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LOS  ANGELES 


SCHOOL  OF  LAW 
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in  2008  with  funding  from 

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THE    ELEMENTS    OF 
BUSINESS    LAW 


WITH  ILLUSTRATIVE 
EXAMPLES  AND  PROBLEMS 


BY 
ERNEST  W.   HUFFCUT 

/;  I 
Dean  of  the  Cornell  University  College  of  Law 


GINN  AND  COMPANY 

BOSTON    •    NEW   YORK    •    CHICAGO     ■    LONDON 
ATLANTA     •     DALLAS     •     COLUMBUS     •     SAN    FRANCISCO 


3Lb 

)cto5 


Copyright,  1905 
By  ERNEST  W.  HUFFCUT 


ALL    RIGHTS    RESERVED 


515.8 


*^;f 


GINN   AND  COMPANY  •  PRO- 
n   1  1    rORS  • BOSTON •!      l.A. 


PREFATORY  NOTE 


An  effort  has  been  made  in  this  book  to  state  as  concisely  and 
clearly  as  possible  the  leading  and  fundamental  principles  of 
business  law,  and  in  place  of  extended  abstract  explanations 
of  them  to  substitute  simple  concrete  examples  showing  them 
in  their  actual  application  to  business  transactions.  In  order 
that  the  conclusions  drawn  in  these  examples  may  be  verified 
and  not  rest  upon  mere  conjecture,  the  examples  have  for  the 
most  part  been  taken  from  cases  decided  in  the  courts.  At  the 
end  of  each  chapter  are  given  a  number  of  concrete  problems 
without  the  conclusions,  intended  to  afford  an  exercise  in  the 
application  of  the  principles  drawn  from  the  text  and  the 
examples.  These  also  have  been  taken  mainly  from  the  decided 
cases.  The  drill  in  the  examples  and  problems  should  be  con- 
stant and  thorough,  and  will  be  found  far  more  interesting 
and  instructive  and  far  better  calculated  to  develop  intelligent 
thinking  and  reasoning  than  the  memorizing  and  repeating  of 
abstract  dogmatic  statements. 

The  arrangement  of  the  book  has  kept  in  view  a  logical  analy- 
sis and  unfolding  of  the  subject.  But  if  for  any  reason  it 
should  be  thought  desirable  to  deal  with  negotiable  instruments 
earlier  in  the  course,  it  would  do  equally  well  to  interchange 
Parts  II  and  III,  giving  the  latter  first. 

Should  the  book  prove  too  extended  for  the  time  allotted, 
Parts  V  and  VI  may  be  omitted,  although  it  would  be  well  to 
cover,  if  possible,  the  chapter  on  partnership.  The  last  three 
chapters  do  not  fall  clearly  within  the  scope  of  business  law, 
and  for  this  reason  and  because  it  has  been  the  object  not 
unduly  to  extend  them,  the  examples  and  problems  have  been 
for  the  most  part  omitted  and  numerous  facsimiles  of  formal 


IV  PREFATORY  NOTE 

documents  substituted.  While  these  chapters  deal  with  some- 
what technical  matters,  the  subjects  involved  are  of  great 
importance  to  all  who  have  property  interests. 

The  glossary  of  legal  terms  should  be  constantly  referred 
to  in  order  that  the  nomenclature  of  the  law  may  be  correctly 
understood.  While  the  glossary  has  been  made  as  complete 
as  practicable,  it  would  be  well  to  supplement  it  by  a  good  law 
dictionary  in  which  more  extended  definitions  and  explanations 
may  be  found. 

The  work  is  based  necessarily  upon  the  common  law.  While 
the  nature  of  statutory  changes  has  been  indicated,  the  precise 
provisions  of  statutes  are  rarely  given  because  these  vary  so 
widely  in  the  different  states  that  such  a  course  would  prove 
misleading.  The  difficulties  of  an  accurate  statement  of  the 
statutory  law  in  a  book  of  this  size  are  in  fact  insurmount- 
able. Should  the  teacher  be  fortunate  enough  to  secure  the 
cooperation  of  a  local  attorney,  some  progress  in  this  direction 
might  be  made. 

It  will  be  found  in  setting  examinations  that  concrete  prob- 
lems are  better  calculated  to  disclose  the  practical  value  of  the 
student's  work  than  questions  calling   mainly  for  definitions, 

rules,  or  abstract  statements.  ^  ,,T  „ 

'  E.  W.  H. 

Cornell  University 

College  of  Law 
July  3,  1905 


PAGE 


TABLE   OF   CONTENTS 

CHAPTER   I 
PRELIMINARY  TOPICS 

Business  Law  and  Cognate  Subjects 

SECTION 

i.  Business        ....••■••••  l 

2.  Law  ....•••••••••  l 

3.  Business  law          .         ...         .....  3 

4.  Divisions  of  the  law  ....•••••  3 

5.  Property 4 

6.  Legal  obligations 5 

7.  Courts  ....••••••••  7 

8.  Procedure  ....•••••• 

9.  Scope  of  this  work         .....••••  9 


Part  I 

THE   PRINCIPLES   OF   CONTRACT 

CHAPTER   II 
FORMATION  OF  CONTRACTS 

10.  Definition  of  contract '3 

11.  Essentials  of  enforceable  contract M 

I.    Agreement 

12.  Contracts  begin  in  agreement ■  T4 

13.  Classes  of  agreements    .         .         .         •         •         •         •         •         •      '5 

14.  Agreements  originate  in  some  form  of  offer  and  acceptance        .  16 


vi  TABLE  OF  CONTENTS 

section  II.    Competent  Parties  page 

15.  Infants l9 

16.  Insane  persons 21 

17.  Married  women     .         .         .         .         .         •         •         •         •         .21 

III.    Consideration 

18.  Necessity  of  consideration 22 

19.  The  consideration  need  not  equal  the  promise  in  value  .         .         -23 

20.  A  past  consideration  will  not  support  a  promise  ...         24 

21.  The  consideration  must  be  legal 25 

IV.    Form:  Writing;  Seal 

22.  Statute  of  Frauds 25 

23.  Contracts  under  seal      .........     28 

V.    Legality  of  Object 

24.  Contracts  made  illegal  by  statute 3° 

25.  Wagering  contracts       .         .         .         .         .         .         .         •  •     31 

26.  Contracts  illegal  at  common  law 33 

27.  Effect  of  illegality  upon  contracts  in  which  it  exists        .         .  -34 

VI.    Reality  of  Consent 

28.  Mistake     .  36 

29.  Fraud  and  misrepresentation  .......  38 

30.  Duress       ...........  39 

31.  Undue  influence    ..........  39 

CHAPTER    III 
OPERATION  AND  DISCHARGE  OF  CONTRACTS 

I.    Liabilities  and  Rights  of  Third  Parties 

32.  Liability  of  third  parties    .         .         .         .         .         •         •         -.48 

33.  Rights  of  third  parties  .........     49 

II.    Assignment  of  Contracts 

34.  Assignment  by  act  of  the  parties         ......  49 

35.  Negotiability  of  certain  contracts  .         .         .         .         -5° 

36.  Assignment  by  operation  of  law  .         .         .         .         .         •         5 l 


TABLE  OF  CONTENTS  vn 

III.    Discharge  of  Contracts 


PAGE 


SECTION 

37.  Discharge  by  agreement  including  performance     .         .         .         •  52 

38.  Discharge  by  impossibility  of  performance  ....  54 

39.  Discharge  by  breach 5" 

Remedies  for  breach  of  contract 58 


40 


IV.    Discharge  in  Bankruptcy 


41.  Insolvency  laws  not  discharging  debtor 59 

42.  Bankruptcy  laws  discharging  debtor 59 

43.  The  state  insolvency  laws      ....••••  °° 

44.  National  Bankruptcy  Law  of  1898 60 


Part   II 

PARTICULAR   CONTRACTS   CONCERNING  GOODS 

CHAPTER   IV 
SALES  OF  GOODS 

I.   The  Contract 

45.  Definition  and  analysis  .....•••     "5 

46.  Statute  of  Frauds 7° 

II.    The  Title 

47.  When  does  title  pass  ? 74 

48.  Specific  or  ascertained  goods 

49.  Unascertained  goods     .....••••  77 

50.  Who  has  the  risk  ? 79 


III.    Performance 


51.  Duties  of  the  seller 

52.  Duties  of  the  buyer 


80 
81 


viii  TABLE  OF  CONTENTS 


IV.    Warranties 


V.    Remedies 


PAGE 


53.  Definition  and  classification  ........  81 

54.  Express  warranties     ....•••■•  °2 

55.  Implied  warranties         ....•••••  83 

56.  The  rule  of  caveat  emptor  .......  85 

57.  Remedies  for  breach  of  warranty 


86 


58.  Rights  of  unpaid  seller  against  the  goods 87 

59.  Rights  of  unpaid  seller  by  way  of  action  for  breach  of  contract      .     90 

60.  Remedies  of  the  buyer 9° 


CHAPTER  V 
BAILMENT  OF  GOODS 

61.  Definition  and  distinctions     ........     96 

62.  Classification  of  bailments 97 

I.    Bailments  solely  for  Benefit  of  One  Party 

63.  Bailments  for  sole  benefit  of  bailor 100 

64.  Bailments  for  bailee's  sole  benefit       .         .         .         •         .         .102 

II.    Mutual  Benefit  Bailments 

65.  Pledge  or  pawn     ..........   104 

66.  Bailee  hires  an  article  of  bailor  .         .         .         .         .         .         .106 

67.  Bailor  engages  bailee  to  keep,  repair,  or  transport  an  article  .         .108 

III.    Special  Cases  of  Bailment  for  Keeping  or  Transportation 

68.  Innkeepers         .         .         .         .         .         .         .         •         •         .111 

69.  Common  carriers  of  goods     .         .         .         .         .         .         •         •   IT3 

IV.    Cases  not  Strictly  of  Bailment 

70.  Public  carriers  of  passengers  and  baggage  .         .         .         .122 

71.  Telegraph  and  telephone  companies       .         .         .         .         .         .124 


TABLE  OF  CONTENTS  ix 


CHAPTER  VI 
INSURANCE  CONTRACTS 

SECTION  PAGE 

72.  Nature  and  kinds  of  insurance  .         .         .         .         .         .128 

73.  Kinds  of  policies  .  .  .  .  .  .  .  .  .129 

74.  Definitions        .  .  .  .  .  .  .  .  .  .129 

75.  Characteristics     .  .  .  .  .  .  .  .  .  -131 

76.  The  insured  must  have  an  insurable  interest      ....        133 

77.  The  contract  of  insurance  is  one  requiring  the  highest  good  faith    134 

78.  Warranties        .  .  .  .  .  .  .  .  .  .136 

79.  Statutory  or  standard  policies       .         .         .         .         .         .         .138 

80.  Marine  insurance     .........        138 


Part   III 

PARTICULAR   CONTRACTS   CONCERNING  CREDITS 
CHAPTER  VII 

CREDITS  AND  LOANS 

81.  Capital  and  credit ;   money  and  exchange  ;  payment     .  .          .   143 

82.  Interest  and  usury    .          .          .          .          .          .          .  .          .148 

83.  Banks           .          .          .          .          .          ,          .          .          .  •          .150 

84.  Bank  deposits  .         .         .         .         .         .         .         .  -    .       151 

85.  Loans  and  discount ;  security       .         .         .         .         .  .         .152 

CHAPTER   VIII 

THE  CONTRACT  OF  GUARANTY 

86.  Guaranty  denned      .         .         .         .         .         .         .  ,         -       157 

87.  A  guaranty  must  be  in  writing     .....  .158 

88.  Consideration  .         .         .         .         .         .         .         .  .                 159 

89.  Notice  of  acceptance  by  guarantee       .         .         .         .  .         •   159 

90.  Notice  to  guarantor  of  the  default  of  the  principal    .  .                 159 

91.  What  will  discharge  the  guarantor       ....  .   160 

92.  Guarantor's  liability           .          .          .          .          .          •  •          .163 

93.  Guarantor's  remedies  .         .         .         .         .         .         •  '•         .164 


x  TABLE  OF  CONTENTS 

CHAPTER   IX 
NEGOTIABLE  INSTRUMENTS 

I.    Nature  and  Characteristics 

PAGE 
SECTION 

94.  Kinds  of  negotiable  instruments 168 

95.  Characteristics  of  negotiable  instruments 170 

96.  Definitions        .  .  .  •  •  •  •  •  •  .  172 

97.  Negotiable  Instruments  Law l79 

II.    Form 

98.  What  a  negotiable  instrument  must  contain      .         .         .         .180 

99.  What  a  negotiable  instrument  must  not  contain  .         .         .  .182 

100.  Nonessentials  ....'•••••        l°2 

101.  Effect  of  blanks  .         .         . l83 

102.  Delivery  ....•••••••        x°4 

III.    Negotiation 

103.  Negotiation;  indorsement;  delivery 185 

104.  Holder  in  due  course l87 

105.  Rights  of  holder  in  due  course 189 

IV.  Maker's  and  Acceptor's  Contract 

106.  Maker's  contract  on  a  promissory  note 191 

107.  Acceptor's  contract  on  a  bill  of  exchange 191 

108.  Presentment  of  bill  of  exchange  for  acceptance         .         .         .       194 

V.  Drawer's  and  Indorser's  Contract 

109.  Drawer's  contract  on  a  bill  of  exchange 195 

1 10.  Indorser's  contract  on  a  bill  or  note 19S 

ill.   Presentment  for  payment     .         .         .         .         •         •         •         .198 

112.  Notice  of  dishonor 200 

113.  Protest 2°4 

114.  Checks 2o8 

115.  Position  of  indorser  after  liability  is  fixed     .  ...  209 


TABLE  OF  CONTENTS  XI 

Part  IV 

AGENCY:    THE  CONDUCT   OF   BUSINESS   THROUGH 
REPRESENTATIVES 

CHAPTER  X 
PRINCIPAL  AND  AGENT 

SECTION  PAGE 

1 1 6.  Agency:  its  divisions  and  problems 215 

I.   Appointment  of  Agents 

117.  Who  may  appoint  agents 217 

118.  Who  may  be  an  agent      ........       219 

119.  Form  of  appointment  .....••••  219 

120.  Ratification      .         .         .         .         .         •         •         •         ■         .219 

121.  Agency  by  necessity    ......•••  222 

122.  Termination  of  agency 222 

123.  Irrevocable  agencies    .........  223 


II.    Obligations  of  Principal  and  Agent  to  Each  Other 

124.  Obligations  of  principal  to  agent      ......       224 

125.  Obligations  of  agent  to  principal 225 


III.    Liability  of  Principal  to  Third  Parties 

126.  General  rules   .....•••••       227 

127.  Agent's  apparent  authority 22§ 

128.  Agents  following  customary  calling 230 

129.  Undisclosed  principal  .         •         ■         •         •         •         •         -231 

130.  Frauds  by  agent 233 


IV.    Liability  of  Agent  to  Third  Parties 

131.  Where  agent  alone  is  liable 233 

132.  Where  both  principal  and  agent  are  bound       ....       234 


PAGE 


xii  TABLE  OF  CONTENTS 

CHAPTER   XI 
MASTER  AND  SERVANT 

I.    Injuries  to  Third  Persons 

SECTION 

133.  Negligent  torts  by  servants 238 

134.  Willful  torts  by  servants 238 

II.  Injuries  to  Servants 

135.  Injury  to  one  servant  by  another  ......   239 

136.  The  master's  nonassignable  duties 240 


Part  V 

BUSINESS  ASSOCIATIONS 

CHAPTER   XII 
PARTNERSHIPS  AND  JOINT-STOCK  COMPANIES 

137.  Forms  of  conducting  business      .         .         .         •         •         •  243 

I.    Partnerships 

138.  What  constitutes  a  partnership 244 

139.  Rights  and  duties  of  partners  as  to  each  other     .         .         .         .247 

140.  Powers  of  partners 247 

141.  Liabilities  of  partners 249 

142.  Rights  and  remedies  of  creditors 249 

143.  Dissolution  .......•••   250 

II.   Joint  Stock  Companies 

144.  How  distinguished  from  ordinary  partnerships  .         .         .       252 

145.  How  like  ordinary  partnerships    .         .         .         -         •         •         .252 


TABLE  OF  CONTENTS 


Xlll 


CHAPTER  XIII 


CORPORATIONS 

SECTION 

146.  Definition  and  classification 

147.  How  a  corporation  is  formed 

148.  Members 

149.  Directors     .... 

150.  Officers  and  agents  . 

151.  Powers  of  a  corporation 

152.  Stockholders'  rights 

153.  Liability  of  stockholders 

154.  Reports  of  corporations    . 

155.  Receivers  of  corporations     . 

156.  Dissolution  of  corporations 


PAGE 
256 

257 
258 
260 
26l 
262 
264 
265 
26S 
266 
266 


Part  VI 


PROPERTY  IN  LAND  AND  MOVABLES 


CHAPTER  XIV 


157 
158 

159 
160 
161 


REAL  PROPERTY 

I.    Estates  in  Real  Property 

Meaning  of  the  term  "property" 

Estates  in  land  ;  duration 

Future  estates  in  land  :  reversions  and  remainders 

Estates  held  jointly  or  in  common     . 

Equitable  estates  :  trusts      ..... 


269 
272 
275 
276 
278 


II.    Land:  Its  Constituents,  Growths,  and  Fixtures 

162.  Extent  of  ownership:  soil,  air,  minerals,  waters         .  .  .        278 

163.  Vegetable  products      .........  279 

164.  Fixtures  ...........       280 

III.    Relative  Rights  of  Adjoining  Owners 

165.  Fences:  cattle  trespass        ........  2S2 

166.  Air  and  waters ;  support  of  land       ,         .         .         .         .         .       282 

167.  Easements  .........  283 


286 
Descent  to  heirs 2°9 


xiv  TABLE  OF  CONTENTS 

IV.   Transfer  of  Interests  in  Lands 

SECTION 

1 68.  Contract  of  sale 283 

169.  Conveyances        ....••••••  2"4 

170.  Wills 
171. 

172.  Adverse  possession •         •         -       291 

V.    Mortgages  and  Liens 

173.  Mortgages  of  real  property .  291 

1 74.  Liens  on  real  property      .  29^ 

VI.   Landlord  and  Tenant 

175.  The  lease  and  its  covenants 29° 

176.  Defects,  repairs,  and  waste 299 

177.  Assignment  and  subletting 3°° 

1 78.  Rent  and  remedies  for  nonpayment 3°° 

179.  Termination  of  lease    .         . 3QI 

CHAPTER  XV 

PERSONAL  PROPERTY 

I.   Classification  :  Kinds  and  Estates 

180.  Classification    ,......•••       3°3 

181.  Property  in  animals     ....•••••  3°4 

182.  Trademarks;  goodwill;  names 3°4 

183.  Estates  in  personal  property •         •  3°6 

II.   Acquisition  and  Transfer 

184.  Acquisition  by  occupancy  and  by  finding  lost  property     .         .       306 

185.  Accession  and  confusion 3°7 

186.  Transfer  by  gift 3°9 

187.  Other  modes  of  transfer 311 

Glossary 3*5 

Index .        •        •         •  323 


ELEMENTS    OF   BUSINESS    LAW 


CHAPTER  I 
PRELIMINARY  TOPICS 

Business  Law  and  Cognate  Subjects 

1.  Business.  Business  concerns  itself  with  property,  credit, 
and  services,  and  with  contracts  pertaining  to  these  things. 

The  term  business  embraces  every  kind  of  industrial  activity 
by  which  men  acquire,  manufacture,  or  otherwise  produce  prop- 
erty ;  by  which  they  sell  or  transfer  it ;  by  which  they  store, 
transport,  or  insure  it ;  by  which  they  borrow  or  lend  money 
and  give  or  secure  credit;  by  which  they  combine  with  others 
to  these  ends ;  and  by  which  they  furnish  or  obtain  services  in 
these  and  similar  enterprises.  This  is  by  no  means  an  exhaust- 
ive list  of  commercial  operations,  but  it  indicates  the  variety 
and  extent  of  those  human  activities  that  pass  under  the  name 
of  business. 

2.  Law.  The  term  law  includes  all  those  rules  by  which 
courts  are  controlled  in  the  administration  of  justice.  The 
same  rules  must  also  govern  men  in  their  relations  to  each 
other,  because  if  they  be  violated,  the  courts  will  either  give 
reparation  to  the  injured  party  or  refuse  to  aid  the  one  who 
has  violated  them. 

Rules  of  law  are  of  two  kinds,  —  first,  those  that  have  been 
worked  out  by  the  courts  themselves  in  deciding  actual  cases 
brought  before  them  by  litigants,  and  second,  those  enacted  by 
the  legislatures.    The  first  are  known  as  the  common  law,  and 


2  PRELIMINARY  TOPICS  [Ch.  I 

the  second  as  statute  law.  The  common  law  is  sometimes 
called  the  unwritten  law,  and  statute  law  is  sometimes  called 
the  written  law. 

1.  Common  /aw.  The  common  law  is  therefore  the  law 
declared  by  judges  in  the  decision  of  cases.  It  rests  primarily 
upon  custom,  because  in  deciding  cases  the  judges  seek  to  give 
effect  to  the  prevailing  customs  of  the  people  in  their  relations 
and  dealings  with  each  other.  But  when  a  point  of  law  is  once 
decided,  subsequent  judges  in  the  same  jurisdiction  follow  it  as 
a  precedent,  and  the  point  is  said  to  be  decisively  settled.  This 
is  known  as  the  doctrine  of  stare  decisis,  —  the  doctrine  that 
courts  must  stand  by  decided  cases,  uphold  precedents,  and 
maintain  former  adjudications.  With  the  lapse  of  time,  there- 
fore, the  greater  number  of  the  ordinary  questions  that  may 
arise  have  been  thus  settled  and  the  common  law  established. 
The  rules  must  be  sought  in  the  printed  reports  of  the  deci- 
sions of  the  courts. 

2.  Statute  law.  Statute  law  consists  of  the  enactments  of 
legislatures.  These  may  be  for  the  purpose  of  changing  some 
rule  established  by  the  courts  when,  for  example,  the  develop- 
ment of  society  makes  the  continuance  of  the  old  rule  inexpe- 
dient, or  for  the  purpose  of  codifying  into  a  brief  statute  "the 
rules  scattered  through  hundreds  or  even  thousands  of  volumes 
of  reported  cases.  The  whole  law  of  negotiable  instruments 
has  been  thus  codified  in  England  and  in  many  of  our  Ameri- 
can states  (see  sec.  97  post). 

In  any  state,  therefore,  one  must  consult  for  the  law  the  statutes  of  that 
state  and  the  reports  of  its  courts.  In  some  states  the  reports  are  very 
numerous.  For  example,  there  are  in  New  York  upwards  of  one  thousand 
volumes  and  in  Massachusetts  nearly  two  hundred  volumes,  and  in  all  the 
states  combined  over  five  thousand  volumes.  A  statute  or  decision  is  not 
binding  except  in  the  state  where  enacted  or  rendered.  Hence  it  follows  that 
the  law  may  be  one  way  in  Massachusetts  and  just  the  opposite  in  New 
York.  As  we  have  the  federal  Congress  and  courts  and  forty-five  state 
legislatures  and  courts,  not  to  mention  territories  and  dependencies,  it  will  be 
seen  that  the  American  law  may  present  many  diverse  enactments  or  deci- 
sions upon  the  same  question.  This  is  what  makes  it  very  difficult  to  present 
in  this  country  a  statement  of  the  law  which  is  correct  for  every  jurisdiction. 


§§3,4]  DIVISIONS  OF  THE  LAW  3 

3.  Business  law.  Business  law  is  that  portion  of  the  general 
law  which  governs  business  transactions.  While  the  term  is 
frequently  used  as  if  it  denoted  a  distinct  body  of  law  suscep- 
tible of  accurate  definition,  it  is  in  reality  a  term  of  vague  mean- 
ing. One  engaged  in  business  transactions  may  be  confronted 
with  legal  questions  involving  almost  any  topic  of  the  law,  and 
hence  might  need  advice  from  an  expert  or  might  in  simple 
cases  be  able  to  solve  the  difficulty  for  himself.  The  most  that 
any  law  book  for  business  men  can  well  undertake  to  do  is  to 
present  the  elementary  principles  governing  the  ordinary  busi- 
ness transactions,  leaving  for  lawyers  the  more  intricate  or 
technical  problems.  The  chief  aim  of  such  a  book  should  be  to 
inform  the  business  man  how  to  keep  out  of  difficulties,  rather 
than  to  enable  him  to  extricate  himself  after  he  is  once  involved. 

Business  law  is,  therefore,  merely  such  a  selection  from  the 
general  body  of  the  law,  and  especially  the  law  of  contract,  as 
a  particular  author  may  think  it  profitable  for  a  business  man 
to  know. 

4.  Divisions  of  the  law.  The  law  may  be  divided  into  two 
great  branches,   public  law  and  private  law. 

1.  Public  law.  Public  law  includes  those  topics  with  which 
the  state,  that  is,  the  public  as  a  whole,  is  especially  concerned, 
namely  :  (a)  international  law,  or  the  law  governing  the  rela- 
tions of  one  nation  to  other  nations  ;  (b)  constitutional  law,  or 
the  fundamental  law  governing  a  nation  or  state  in  its  relations 
to  its  citizens ;  (c)  criminal  law,  or  the  law  by  which  the  public 
protects  itself  against  crimes  and  offenses  prejudicial  to  its 
well-being ;  and  (d)  administrative  law,  or  the  law  under  which 
governmental  affairs  are  carried  on,  as  tax  laws,  highway  laws, 
and  the  like. 

2.  Private  law.  Private  law  includes  those  topics  with  which 
individuals  are  particularly  concerned  in  their  private  relations. 
These  are  very  numerous  but  may  be  roughly  grouped  under 
three  main  heads,  namely:  (a)  the  law  of  property,  including 
acquisition,  ownership,  possession,  security,  alienation,  descent, 
and  the  like;  (b)  the  law  of  obligation,  including  contracts, 
torts,  trusts,  and  the  like  ;  and  (c)  the  law  of  procedure,  or  the 


4  PRELIMINARY  TOPICS  [Ch.  I 

law  by  which  cases  are  brought  into  courts  and  conducted  to 
trial  and  judgment. 

The  topics  treated  under  the  head  of  business  law  are  those 
involving  either  the  law  of  property  or  the  law  of  obligation. 
The  acquisition  and  disposition  of  property,  the  making  and 
performing  of  contracts,  constitute  the  major  part  of  a  business 
enterprise. 

5.  Property.  Property  consists  in  the  ownership  of  mate- 
rial objects,  or  the  ownership  of  some  right  in  or  to  a  material 
object,  or  the  ownership  of  some  right  against  a  person,  or  the 
ownership  of  some  immaterial  right  to  be  exercised  to  the 
exclusion  of  others.  Material  objects  are  either  immovable, 
like  land,  or  movable,  like  coin,  cattle,  or  merchandise.  One 
may  own  and  possess  these  things,  or  he  may  own  a  right  in 
them,  as  when  he  has  a  right  to  cross  another's  lands  or  a  right 
to  sell  another's  goods  pledged  to  him  for  a  debt.  Immaterial 
property  may  consist  in  a  right  granted  by  statute  or  usage  to 
the  exclusion  of  others,  as  a  right  to  a  patent  or  to  a  trade- 
mark ;  or  it  may  consist  of  a  right  against  a  person,  as  a  right 
to  compel  him  to  pay  a  promissory  note  or  to  pay  damages  for 
a  trespass  to  property. 

The  law  regards  property  as  either  real  property  or  personal 
property. 

i .  Real  property.  Real  property  consists  of  any  estate  or 
interest  in  lands,  except  a  leasehold  estate  for  years  or  a  mort- 
gage or  lien.  There  are  two  such  estates  :  an  estate  of  inher- 
itance, or,  as  it  is  often  called,  an  estate  in  fee,  which  is  an 
estate  that  descends  to  the  owner's  heirs  ;  and  an  estate  for 
life  which  terminates  at  the  death  of  the  owner  or  of  some 
other  designated  person  (see  sec.  158  post). 

2.  Personal  property.  All  other  property  is  personal  prop- 
erty. This  includes  (1)  chattels  real,  that  is,  leasehold  interests 
in  lands  ;  (2)  chattels  personal,  that  is,  all  other  kinds  of  prop- 
erty consisting  of  the  following  classes  :  (a)  corporeal  movable 
objects  ;  (b)  incorporeal  rights  or  privileges,  like  patents,  copy- 
rights, trademarks,  and  good  will  in  a  business  ;  (c)  rights  of 
action  against  persons,  called  choses  (i.e.  things)  in  action. 


§6]  LEGAL  OBLIGATIONS  5 

The  kinds  of  property  with  which  business  is  chiefly  con- 
cerned arc  corporeal  movable  objects  and  choses  in  action. 
The  former  are  goods,  wares,  and  merchandise ;  the  latter  are 
negotiable  instruments,  stocks  and  bonds,  mortgages  and  liens, 
and  debts  in  general. 

6.  Legal  obligations.  Legal  obligations  are  those  which  the 
law  enforces.  They  arise  either  by  agreement  or  by  the  policy 
of  the  law,  independent  of  an  agreement. 

1.  Contract.  An  agreement  enforceable  at  law  we  call  a  con- 
tract, and  the  failure  or  refusal  to  carry  out  the  agreement  we 
call  a  breach  of  contract. 

Example:  1.  A  agrees  with  B  that  A  shall  sell  and  B  shall  buy  A's 
bicycle  for  $30.  This  is  a  contract.  If  either  party  refuses  to  carry  out 
his  part  of  it,  the  other  has  a  case  at  law  for  damages. 

Contracts  have  to  do  with  a  great  variety  of  interests,  and 
many  special  kinds  of  contracts  may  be  enumerated,  such  as 
contracts  of  sale,  contracts  of  bailment,  contracts  of  carriage, 
contracts  of  insurance,  contracts  of  partnership,  contracts  of 
guaranty,  contracts  for  the  loan  of  money,  and  the  like. 

2.  Tort.  The  obligations  fixed  by  private  law  independent 
of  agreement  have  no  specific  names,  but  the  breach  of  any 
of  these  obligations  is  called  a  tort,  which  is  simply  the  French 
word  for  wrong.    Many  of  these  torts  have  specific  names. 

Examples:  2.  A  strikes  B  in  anger.  A  has  committed  the  tort  called 
assault  and  battery. 

3.  C  goes  without  permission  on  D's  land.  C  has  committed  the  tort 
called  trespass. 

4.  E  speaks  false  and  malicious  words  derogatory  to  F's  character. 
E  has  committed  the  tort  called  slander.  If  E  writes  the  words,  the  tort 
is  called  libel. 

5.  G  drives  so  carelessly  in  the  street  as  to  run  into  and  injure  H's 
carriage.     G  has  committed  the  tort  known  as  negligence. 

In  each  of  the  above  cases  the  wrongdoer  was  under  an 
obligation  fixed  by  the  law  not  to  infringe  the  personal  security 
or  property  rights  of  another  to  his  damage,  and  to  use  due 
care  for  the  safety  of  others  and  their  property.  The  violation 
of  this  obligation  constitutes  the  tort. 


6  PRELIMINARY  TOPICS  [Ch.  1 

Where,  in  the  formation  of  a  contract,  one  party  knowingly 
makes  a  false  representation  to  the  other,  a  tort  is  committed. 
Where,  after  a  contract  is  made,  a  stranger  to  it  induces  one 
of  the  parties  to  break  it,  a  tort  is  also  committed. 

Examples :  6.  A  wishes  to  sell  sheep  to  B.  He  tells  B  that  they  are 
sound  and  healthy.  He  knows  they  are  diseased.  B  buys  the  sheep  and 
afterwards  discovers  that  they  are  diseased,  (a)  There  is  a  contract 
between  A  and  B.    (b)  There  is  a  tort,  known  as  deceit,  committed  by  A. 

7.  A  agrees  to  work  for  B.  X,  knowing  this,  induces  A  to  break  the 
contract.  X  has  committed  a  tort  which  has  no  very  specific  name.  It  is 
called  "  inducing  breach  of  contract,"  or,  in  this  form  of  contract,  "  enticing 
away  a  servant." 

3.  Quasi-contracts.  In  certain  cases  where  there  is  no  true 
contractual  agreement,  the  law,  by  reason  of  some  act  or  situa- 
tion of  a  party,  imposes  an  obligation  upon  him  and  gives  a 
remedy  against  him,  as  if,  in  fact,  his  obligation  did  arise  from 
agreement.  In  order  to  prevent  injustice  and  to  give  an  efficient 
remedy,  the  law  indulges  in  such  cases  the  fiction  that  a  promise 
was  made,  and  permits  an  action  in  contract.  These  cases  are 
called  quasi-contracts  because  they  are  like  contracts,  although 
not  true  contracts. 

Examples :  8.  A  steals  B's  money.  B  may  recover  the  money  in  a  con- 
tract action,  there  being  by  fiction  of  law  an  implied  promise  to  repay  it. 

9.  C  by  mistake  pays  D  more  than  he  owes.  C  may  recover  the  excess 
in  a  contract  action.  The  law  implies  a  promise  by  D  to  return  the  over- 
payment. 

10.  E  is  a  lunatic,  known  to  be  one,  and  incapable  of  making  a  contract. 
F  furnishes  E  with  necessary  food.  F  may  recover  the  reasonable  value  of 
the  food  in  a  contract  action.  The  law  creates  the  promise  of  the  lunatic  to 
pay  for  necessaries. 

4.  Trusts.  A  trust  is  an  obligation  of  one  who  has  the  legal 
title  to  property  to  account  for  it  to  one  who  has  the  beneficial 
or  equitable  interest.  Trusts  are  not  recognized  or  enforced  by 
the  courts  known  as  the  law  courts,  but  by  the  courts  known 
as  the  equity  or  chancery  courts.  These  courts  are  explained 
in  the  next  section.  Law  courts  recognize  only  legal  titles  and 
interests,  but  equity  courts  recognize  equitable  titles  and 
interests. 


§  7]  COURTS  7 

Example  II.  B  conveys  or  wills  his  farm  in  trust  to  C  to  receive  the 
rents  and  income  and  pay  the  same  over  to  D.  This  is  a  trust.  D's  rights 
are  not  recognized  by  the  law  courts,  but  the  equity  courts  recognize  and 
enforce  D's  rights  and  compel  C  to  account  to  D  for  the  rents  and  income. 

The  so-called  "  trusts  "  referred  to  in  current  economic  discussions  are 
not  now  trusts  in  the  above  sense,  but  are  simply  monopolistic  combina- 
tions. Originally  stockholders  in  various  corporations  placed  their  shares 
in  trust  with  a  committee,  and  the  total  profits  of  all  the  corporations  were 
divided  among  the  various  stockholders  pro  rata,  thus  constituting  a  real 
trust.  But  it  is  now  the  custom  to  unite  all  the  corporations  into  one  cor- 
poration, in  order  to  eliminate  competition.  This  does  not  create  a  true 
trust,  but  the  old  name  continues  to  be  used  to  describe  the  new  monopolistic 
device. 

7.  Courts.  The  courts  of  a  particular  state  may  consist  of 
law  courts  and  equity  courts,  although  in  modern  times  these 
are  often  combined.  The  United  States  has  also  an  admiralty 
court,  or  rather  a  court  with  admiralty  jurisdiction. 

i.  Law  courts.  Law  courts  are  organized  tribunals  for  the 
trial  of  cases  and  the  hearing  of  appeals.  Each  state  has  trial 
courts  and  at  least  one  court  to  which  appeals  may  be  taken. 
Trial  courts  consist  of  a  judge  and  a  jury,  with  attendant  officers. 
Appellate  courts  consist  of  a  bench  of  judges  without  a  jury. 

The  trial  courts  are  generally  the  following. 

(a)  A  court  of  general  jurisdiction  is  one  before  which  most 
cases  may  be  brought.  This  is  usually  called  a  circuit  court, 
because  the  judges  go  on  circuit  from  place  to  place  to  hold 
trials. 

(b)  Courts  of  limited  or  local  jurisdiction  are  for  the  trial  of 
smaller  cases  ;  such  are  county  courts,  city  courts,  and  courts 
held  by  justices  of  the  peace. 

{c)  Courts  for  the  administration  of  the  estates  of  deceased 
persons  are  called  the  surrogate's  court,  probate  court,  orphans' 
court,  etc. 

The  appellate  courts  are  those  to  which  appeals  are  taken 
from  the  trial  courts.  Most  states  call  the  appellate  courts  the 
Supreme  Court.  In  New  York,  however,  the  highest  appellate 
court  is  called  the  Court  of  Appeals,  and  the  trial  court  of 
general  jurisdiction  is  called  the  Supreme  Court.    Owing  to  the 


8  PRELIMINARY  TOPICS  [Ch.  I 

large  amount  of  appellate  work,  some  states  have  an  intermediate 
appellate  court.  In  New  York  this  is  called  the  Appellate 
Division  of  the  Supreme  Court. 

In  the  federal  jurisdiction  the  trial  courts  are  the  District 
Court  and  the  Circuit  Court ;  the  intermediate  appellate  court 
is  the  Circuit  Court  of  Appeals,  and  the  highest  appellate  court 
is  the  Supreme  Court. 

2.  Equity  courts.  Side  by  side  with  the  common  law  courts 
there  grew  up  in  England  a  separate  court  known  as  the  equity 
court  or  the  chancery  court.  This  court  consisted  of  a  judge 
without  a  jury,  and  was  intended  to  give  relief  in  hard  cases 
where,  by  the  somewhat  rigid  rules  of  the  common  law  courts, 
none  could  be  had.  A  body  of  rules  or  doctrines  evolved  by 
this  court  is  known  as  "  equity."  Equity  consists,  therefore, 
of  the  rules  and  doctrines  by  which  equity  courts  are  controlled 
in  the  administration  of  justice. 

In  a  few  of  our  states  such  separate  equity  courts  still  exist ; 
but  generally  the  powers  of  a  common  law  court  and  of  an 
equity  court  have  been  combined  in  one  court  which  admin- 
isters both  law  and  equity.  In  such  case  the  court  of  general 
jurisdiction  is  both  a  common  law  and  an  equity  court.  If  one 
wished  to  sue  for  breach  of  contract  or  for  an  accounting  for 
a  trust,  he  would  go  before  the  same  court  :  in  the  contract 
case  the  judge  with  a  jury  would  administer  law  rules ;  in  the 
trust  case  the  judge  without  a  jury  would  administer  equity 
rules. 

3.  Admiralty  courts.  Admiralty  courts  administer  still  a 
different  law,  known  as  the  admiralty  law  or  law  of  the  sea. 
They  have  to  do  with  vessels  and  their  cargoes  and  crews  upon 
public  navigable  waters.  There  is  no  separate  court  of  admi- 
ralty in  the  United  States  ;  the  District  Courts  of  the  United 
States  have  admiralty  jurisdiction  and  administer  admiralty 
law.  State  courts  have  no  admiralty  jurisdiction.  An  admiralty 
court  consists  of  a  judge  without  a  jury.  The  judge  is  the  trier 
of  the  facts  as  well  as  the  administrator  of  the  law. 

8.  Procedure.  A  case  is  brought  before  a  court  by  pleadings. 
The  plaintiff  makes  a  complaint  or  declaration,  setting  out  his 


§9]  SCOPE  OF  THIS  WORK  9 

cause  of  action,  and  a  summons  to  appear  and  answer  this  is 
served  upon  the  defendant.  The  latter  makes  an  answer  to  the 
complaint.  Upon  these  documents,  or  others  which  may  be 
allowed,  the  issue  is  framed,  that  is,  the  question  in  dispute  is 
made  clear. 

At  a  time  appointed  the  parties  go  before  the  court  with 
their  attorneys  and  witnesses  and  give  evidence  to  sustain  their 
contentions.  The  jury  is  instructed  by  the  judge  as  to  the  law 
of  the  case,  and  renders  its  verdict  upon  the  facts  proved 
and  the  instructions  received.  The  court  enters  a  judgment 
in  accordance  with  this  verdict. 

The  defeated  party  may  appeal  from  this  judgment.  His 
attorney  prepares  a  transcript  of  the  evidence,  and  with  this, 
upon  notice  to  his  adversary,  goes  before  an  appellate  court  of 
judges  and  asks  to  have  the  judgment  reversed.  Argument  by 
both  parties  is  heard  by  the  appellate  court.  If  the  court  finds 
a  substantial  error  in  the  rulings  or  instructions  of  the  trial 
judge,  or  finds  the  verdict  unsupported  by  the  evidence,  it  may 
reverse  the  judgment  and  order  a  new  trial.  Otherwise  it 
affirms  the  judgment. 

If  a  new  trial  is  ordered,  the  same  procedure  is  repeated 
except  that  no  new  pleadings  are  necessary. 

When  a  final  judgment  is  entered  the  successful  party  is 
entitled,  besides  any  judgment  for  a  fixed  sum,  to  such  costs  as 
may  be  allowed  by  law.  If  the  judgment  is  not  paid,  he  may 
issue  an  execution  against  the  property  of  his  adversary,  and 
the  sheriff  may  levy  on  the  property  and  sell  it  to  satisfy  the 
judgment.  In  every  state  a  certain  amount  of  property  is 
exempt  from  levy  and  sale  upon  judgments.  These  exemption 
laws  are  intended  to  secure  to  debtors  certain  household  neces- 
sities, tools  of  a  trade,  and  often  a  homestead. 

9.  Scope  of  this  work.  A  business  man  has  to  deal  mainly 
with  property  and  contracts.  He  can  hardly  carry  on  business 
without  dealing  directly  or  indirectly  with  some  species  of 
property,  and  very  often  the  purchase  and  sale  of  property  is 
the  chief  part  of  his  business.  He  cannot  carry  on  business 
at  all  without  making  contracts,  —  often  scores  or  hundreds  of 


IO  PRELIMINARY  TOPICS  [Ch.  I,  §  9] 

contracts  in  a  single  day.  Accordingly  these  two  topics  of  the 
law  are  those  with  which  the  business  man  should  be  especially 
familiar.  He  needs  to  know  what  constitutes  a  binding  con- 
tract, what  obligations  arise  upon  its  completion,  and  what 
steps  are  necessary  to  its  legal  performance.  While  he  can 
hardly  hope  to  know  technically  about  torts,  he  ought,  if  an 
employer  of  workmen,  to  know  what  obligations  he  under- 
takes as  concerns  their  safety,  and  what  liabilities  he  incurs  by 
failing  to  use  due  care  to  have  the  instrumentalities  of  his  busi- 
ness in  a  safe  condition.  It  will  be  the  object  of  this  work  to 
state  some  of  the  more  important  legal  rules  connected  with 
these  subjects. 

We  shall  first  consider  the  formation  of  contracts,  that  is, 
what  constitutes  a  binding  and  enforceable  agreement.  This 
will  be  followed  by  a  discussion  of  the  operation  of  contracts, 
—  that  is,  the  rights  arising  from  them,  —  and  the  discharge  of 
contracts,  —  that  is,  how  they  are  ended  and  the  rights  under 
them  terminated. 

These  general  principles  will  be  followed  by  a  discussion  of  the 
particular  contracts  concerning  personal  property,  —  namely,  the 
sale,  bailment,  carriage,  and  insurance  of  goods, — and  the  par- 
ticular contracts  concerning  credit, — that  is,  contracts  creating 
debts,  contracts  of  guaranty,  and  contracts  contained  in  com- 
mercial paper. 

Agency,  the  means  by  which  one  makes  contracts  through 
an  employee,  follows  the  discussion  of  contracts  and  their 
special  forms.  Here  also  is  an  excursus  upon  the  subject  of 
master  and  servant. 

Business  associations,  such  as  partnerships  and  corporations, 
are  next  discussed. 

Finally,  there  is  a  concise  treatment  of  the  subject  of  prop- 
erty, real  and  personal,  in  order  to  bring  together  some  topics 
not  treated  under  the  head  of  contract. 


REVIEW  QUESTIONS  n 


REVIEW  QUESTIONS 

Section  1.  With  what  is  business  concerned?  What  is  included  in  the 
term  business?  Enumerate  all  the  different  kinds  of  business  conducted 
on  a  specified  block  of  a  business  street  in  your  city  or  village. 

2.  Define  law;  common  law;  statute  law.  Who  declares  the  common 
law  ?  Where  is  it  found  ?  What  is  it  based  upon  ?  What  is  the  force  of 
precedents?  What  are  the  two  objects  of  statute  law?  Why  is  the  law 
more  difficult  to  state  in  America  than  in  England  ? 

3.  Explain  "  business  law."  From  what  branch  of  the  law  is  it  mainly 
taken  ? 

4.  Name  two  main  divisions  of  the  law.  What  does  public  law  include  ? 
What  does  private  law  include  ? 

5.  What  is  property?  What  objects  and  rights  constitute  property? 
What  is  real  property?  Is  an  estate  for  years  real  property?  Is  a 
mortgage?  What  two  kinds  of  personal  property?  What  three  kinds  of 
personal  chattels?  With  what  two  kinds  of  property  is  business  chiefly 
concerned  ? 

6.  What  are  legal  obligations  ?  How  do  they  arise  ?  Distinguish  between 
contract  obligation  and  tort  obligation.  Illustrate.  Name  and  illustrate 
some  torts.  Explain  and  illustrate  quasi-contracts.  Explain  and  illustrate 
trusts.    Explain  the  meaning  of  the  term  "  trust  "  in  economic  discussions. 

7.  What  is  a  court  ?  a  trial  court  ?  an  appellate  court  ?  Describe  three 
kinds  of  trial  courts.  Name  the  federal  courts.  What  are  equity  courts  ? 
Do  they  have  a  jury?  What  is  equity?  What  are  admiralty  courts? 
What  cases  do  they  hear?    What  is  the  United  States  admiralty  court? 

8.  Describe  the  steps  in  bringing  a  case  before  a  court  and  to  trial  and 
judgment.  Explain  the  process  of  an  appeal.  How  is  a  judgment  enforced  ? 
What  are  exemptions? 


PART    I 

THE   PRINCIPLES  OF   CONTRACT 

CHAPTER   II 

FORMATION  OF  CONTRACTS 

10.  Definition  of  contract.  A  contract  is  an  agreement  between 
two  or  more  persons  for  the  breach  of  which  a  court  of  law  will 
give  damages.  There  are  many  agreements  for  the  breaking  of 
which  no  damages  can  be  had,  either  because  the  agreement 
contemplates  no  legal  relations  or  because  it  ends  in  a  legal 
relation  that  is  enforceable  only  in  a  court  of  equity. 

Examples :  i.  B  agrees  to  sell  a  watch  to  C  for  $25,  and  C  agrees  to 
pay  B  $25  for  the  watch.  This  is  a  contract.  If  B  refuses  to  deliver  the 
watch,  C  has  an  action  at  law  against  B  for  damages.  If  C  refuses  to  take 
the  watch  and  pay  the  $25,  B  has  an  action  at  law  against  C  for  damages. 

2.  D  and  E  mutually  agree  that  they  will  meet  each  other  at  a  desig- 
nated place  and  go  to  a  football  game  together.  This  is  not  a  contract.  It 
contemplates  social,  not  legal,  relations. 

3.  F  agrees  with  G  to  take  G's  property  and  invest  it,  receive  the 
income,  pay  the  income  to  G  during  his  life,  and  divide  the  principal  among 
G's  children  after  G's  death.  This  creates  a  trust.  If  F  failed  to  pay  over 
the  income,  G's  remedy  would  be  by  suit  in  equity  for  an  accounting,  not 
at  law  for  damages.  Since  the  agreement  is  not  enforceable  at  law,  it  is 
not  a  contract. 

The  agreement  may  give  one  party  the  right  to  demand  that 
the  other  do  something  (affirmative  contract),  or  it  may  give 
one  party  the  right  to  demand  that  the  other  forbear  from 
doing  something  (negative  contract),  or  the  same  agreement 
may  give  both  rights. 

13 


I4  FORMATION  OF  CONTRACTS  [Ch.  II 

Example  4.  B  sells  his  dry  goods  business  to  C  for  $5000,  and  agrees 
not  to  engage  in  that  business  again  in  the  same  city.  C  acquires  two 
rights  :  first,  the  right  to  have  B  transfer  to  him  the  business,  and  second, 
the  rio-ht  to  have  B  forbear  to  enter  into  competition  with  him.  For  the 
breach  of  either  of  these  terms  C  has  an  action  at  law  for  damages.  (For 
the  breach  of  the  second  he  might  also  secure  an  injunction  in  equity, 
because  the  damages  he  would  suffer  from  B's  competition  are  so  uncertain 
that  the  legal  remedy  is  deemed  inadequate ;  but  since  he  may  have  dam- 
ages at  law,  the  agreement  is  a  contract.  Equity  courts  sometimes  specif- 
ically enforce  contracts.) 

The  persons  making  the  agreement  may  be  two  or  more,  but 
they  are  so  divided  as  to  constitute  two  groups  of  persons. 

Example  5.  B  sells  his  horse  to  C  and  D.  C  and  D  resell  the  horse  to 
E,  F,  and  G.  In  the  first  contract  B  is  on  one  side  and  C  and  D  jointly  on 
the  other.  In  the  second  contract  C  and  D  are  on  one  side  and  E,  F,  and 
G  on  the  other. 

In  some  cases  three  parties  make  among  them  three  con- 
tracts, which  constitute  what  is  called  a  novation. 

Example  6.  A  owes  B  $100.  B  owes  C  $100.  The  three  meet  and 
agree  that  A  shall  pay  C.  B's  claim  on  A  is  extinguished.  B's  obligation 
to  C  is  extinguished.  A  new  obligation  from  A  to  C  is  created.  Thus  there 
are,  in  effect,  three  contracts. 

11.  Essentials  of  enforceable  contract.  In  order  that  a  contract 
shall  be  enforceable,  that  is,  one  for  the  nonperformance  of 
which  the  law  will  give  damages,  the  following  elements  must  be 
present :  (1)  an  agreement ;  (2)  by  competent  parties  ;  (3)  upon 
sufficient  consideration  ;  (4)  in  some  cases,  evidenced  in  a  par- 
ticular form;  (5)  for  a  legal  object;  and  (6)  made  without 
mistake,  fraud,  undue  influence,  or  duress. 

I.  Agreement 

12.  Contracts  begin  in  agreement.  All  true  contracts  begin 
with  an  agreement.  By  agreement  is  meant  the  meeting  of 
the  minds  of  the  contracting  parties  in  a  common  assent  to  the 
same  definite  conclusion.  But  the  state  of  the  mind  of  a  party 
must  be  judged  by  what  he  says  and  does.  He  cannot  definitely 
agree  to  a  thing  and  afterwards  escape  upon  the  plea  that  he 


§i3]  AGREEMENT  -  15 

misspoke  himself  or  did  an  act  manifesting  agreement  which 
he  did  not  intend  to  do. 

Examples :  1.  B  leads  out  a  colt  and  says  to  C,  "  I  will  sell  you  this 
colt  for  #40."  C  answers,  "  1  will  take  him  at  that  price."  B  discovers  he 
has  led  out  a  colt  he  did  not  intend  to  sell.     B  is  bound. 

2.  B  writes,  "  I  will  sell  you  10,000  bushels  of  wheat  at  80  cents  a 
bushel."  C  replies,  "  I  will  accept  your  offer."  B  asserts  he  intended  to 
write,  and  thought  he  had  written,  "  1,000  bushels."  B  is  bound  to  deliver 
10,000  bushels  or  pay  damages  for  nondelivery. 

Agreements  must  be  definite  enough  to  enable  a  court  to 
ascertain  and  enforce  the  terms.  Indefinite  and  uncertain 
agreements  are  unenforceable,  because  the  court  will  not  make 
or  complete  contracts  for  parties. 

Examples:  3.  "I  will  sell  you  one  hundred  acres  of  land  for  $1000." 
"  I  accept."  This  is  too  uncertain  because  no  definite  one  hundred  acres 
are  indicated. 

4.  "  I  will  sell  you  one  hundred  bushels  of  potatoes  for  $60."  "  I 
accept."  This  is  definite  enough  because  no  particular  one  hundred  bushels 
need  be  specified. 

5.  "  I  will  give  as  much  for  your  horse  as  A  says  he  is  worth."  "  I 
accept."  This  is  definite  enough  because  a  way  of  ascertaining  the  price 
has  been  agreed  upon. 

6.  "  Send  me  one  hundred  bushels  of  potatoes."  The  potatoes  are 
delivered.     This  is  enough.     The  market  price  is  understood. 

13.  Classes  of  agreements.  Agreements  leading  to  legal  obliga- 
tions serve  three  purposes,  namely,  to  create  rights,  to  transfer 
rights,  and  to  extinguish  rights.  An  agreement  which  creates 
a  right  is  called  a  contract.  An  agreement  which  transfers  a  right 
is  called  an  assignment.  An  agreement  which  extinguishes  a 
right  is  called  a  release  or  discharge.    All  are  in  fact  contracts. 

Examples :  1.  A  and  B  agree  that  A  shall  sell  and  deliver  his  horse  to 
B  for  $100,  which  B  agrees  to  pay  sixty  days  after  such  delivery.  This  is  a 
contract.  When  A  delivers  the  horse  he  has  performed  his  part,  and  has  a 
right  against  B  to  demand  the  $100  in  sixty  days. 

2.  A  agrees  with  C  to  transfer  to  C  this  right  against  B  in  exchange  for 
a  cow.    This  is  an  assignment  by  A  to  C  of  A's  right  against  B  to  the  $100. 

3.  C,  who  now  owns  the  right  against  B,  agrees  with  B  to  accept  and 
does  accept  a  buggy  as  the  equivalent  of  the  $100.  C  thereby  discharges 
the  right  against  B. 


!6  FORMATION  OF  CONTRACTS  [Ch.  II 

14.  Agreements  originate  in  some  form  of  offer  and  acceptance. 
An  offer  is  an  expression  by  one  person  of  his  willingness  to 
become  a  party  to  an  agreement  in  accordance  with  terms 
expressed  or  indicated.  Acceptance  is  the  expression  by  the 
person  to  whom  the  offer  was  made  of  his  willingness  to  do  or 
forbear  from  doing  what  the  offeror  requires. 

The  offer  may  be  of  a  promise  or  of  an  act.  The  acceptance 
may  be  the  giving  of  a  promise  or  the  doing  of  an  act.  No 
words  need  be  used.  We  may  have  a  contract  in  which  there 
is  a  promise  for  a  promise,  that  is,  an  outstanding  promise  on 
each  side ;  this  is  called  a  bilateral  executory  contract.  Or  we 
may  have  a  contract  in  which  there  is  a  promise  outstanding 
on  one  side  and  the  act  performed  on  the  other ;  this  is  called 
a  unilateral  executory  contract.  When  both  parties  have  fully 
performed  the  contract  it  is  said  to  be  an  executed  contract. 
When  a  promise  is  put  into  words  it  is  said  to  be  an  express 
promise  ;  when  it  is  inferred  from  acts  or  conduct  it  is  called 
an  implied  promise. 

Examples  :  I.  Promise  for  promise  :  "  I  will  work  for  you  for  one  month 
for  $30."  "  Agreed."  There  is  an  outstanding  promise  on  each  side  before 
any  act  is  done. 

2.  Promise  for  act:  "  I  will  pay  you  $ro  if  you  find  and  return  my  lost 
watch."  The  offeree  finds  and  returns  the  watch.  The  contract  is  then 
complete.     There  is  an  outstanding  promise  on  one  side. 

3.  Act  for  promise  :  A  newspaper  is  sent  regularly  to  a  person  who  takes 
and  reads  it  as  often  as  it  reaches  him.  The  offer  is  in  the  sending  of  the 
paper.    The  promise  to  pay  for  it  is  implied  from  the  receiving  and  using  it. 

There  are  certain  rules  governing  offer  and  acceptance  that 
are  often  applied  in  order  to  determine  whether  an  agreement 
has  been  reached.    These  will  be  briefly  enumerated. 

1 .  The  offer  must  be  communicated  to  the  offeree.  This,  as  we 
have  seen,  may  be  by  oral  or  written  words  or  by  acts  and  con- 
duct. However  expressed,  the  offer  must  actually  reach  the  offeree 
or  there  can  be  no  acceptance  by  him.  The  offer  may  be  made 
to  all  the  world  but  must  be  accepted  by  some  definite  person. 

Example  4.  B  publishes  in  a  newspaper  an  offer  of  #10  reward  for  the 
return  of  his  lost  watch.    C   returns  the  watch,   not  knowing  that  such   a 


§i4]  »  AGREEMENT  1 7 

reward  has  been  offered.  Afterwards  C  learns  of  the  offer  and  claims  the 
reward.  He  cannot  compel  B  to  pay  it,  because  the  act  was  not  done 
relying  upon  the  offer  or  with  knowledge  of  it.  (But  one  or  two  states 
allow  a  recovery  upon  no  very  well  defined  principle.) 

2.  The  acceptance  must  be  either  communicated  or  else  actively 
manifested  in  a  manner  contemplated  by  the  terms  of  the  offer. 
Mental  determination  to  accept  is  not  enough ;  the  mental 
intent  must  be  unequivocally  indicated.  If  the  offeror  has 
stated  how  it  shall  be  indicated,  the  offeree  may  do  what  is 
required  without  actually  communicating  with  the  offeror;  but 
stipulating  that  silence  shall  be  deemed  an  acceptance  will  not 
make  it  so,  since  the  offeror  cannot  impose  on  the  offeree  the 
obligation  to  speak.  Speech  or  action  is  necessary.  When  an 
offer  is  sent  by  mail,  it  is  implied  that  the  offeree  may  indicate 
assent  by  mailing  an  acceptance ;  and  the  contract  is  complete 
when  the  letter  is  mailed,  although  it  may  never  be  received. 

Examples:  5.  B  writes  C:  "I  will  give  you  $ioo  for  your  horse.  If 
within  ten  days  I  do  not  hear  from  you  to  the  contrary,  I  shall  consider 
that  you  accept."  No  answer  is  returned  to  B.  There  is  no  contract  even 
though  C  has  mentally  determined  to  accept.  Mere  silence  does  not  give 
consent.  If  B  had  specified  some  act  that  C  was  to  do  to  indicate  assent, 
the  doing  of  the  act  with  the  intent  to  accept  would  be  enough. 

6.  D  advertises  that  if  any  one  buys  and  uses  his  medical  remedy  as 
directed  and  afterwards  contracts  any  disease  caused  by  taking  cold,  he  will 
pay  to  such  person  $100.  E  buys  and  uses  the  medicine  as  directed  and  after- 
wards contracts  a  cold  and  disease  caused  by  the  cold.  D  is  held  liable  to 
pay  E  the  $100.  E's  acceptance  of  D's  offer  is  manifested  by  buying  and 
using  the  medicine  as  directed,  with  knowledge  of  the  offer.  It  is  not  neces- 
sary for  E  to  communicate  his  acceptance  to  D. 

7.  F  posts  a  letter  to  G,  offering  to  sell  his  horse  to  G  for  $1 50.  G  receives 
the  letter  on  Monday,  and  on  Tuesday  posts  a  letter  directed  to  F,  accepting 
the  offer.  The  letter  is  lost  in  the  mails  and  never  reaches  F,  who  on 
Friday  sells  his  horse  to  H.  F  is  liable  to  G  in  damages  for  breach  of 
contract,  for  the  contract  was  completed  by  acceptance  as  soon  as  G 
posted  his  reply.  If  F  wishes  to  guard  against  this,  he  should  say  in  his 
letter,  "  Upon  receiving  your  acceptance  the  sale  will  be  closed,"  or  use 
some  similar  phrase  especially  requiring  that  the  acceptance  should  be  actu- 
ally received.  By  using  the  mails  the  offeror  impliedly  invites  the  offeree 
to  use  the  mails,  with  the  result  indicated.  If  F's  offer  were  personal,  there 
would  ordinarily  be  no  implied  invitation  to  use  the  mails  for  an  accept- 
ance; but  there  might  be  an  invitation  either  expressed  or  gathered  from 


1 8  FORMATION  OF  CONTRACTS  [Ch.  L 

circumstances,  as,  if  G  lives  at  a  distance  and  is  told  by  F  to  go  home, 
think  it  over,  and  let  him  know,  G  may  use  the  mails,  and  his  acceptance  is 
complete  when  the  letter  containing  it  is  duly  posted. 

3.  The  acceptance  must  be  absolute  and  accord  with  the  terms 
of  the  offer.  If  the  offeree  qualifies  his  acceptance  in  any 
way,  it  is  not  an  acceptance  but  merely  a  counter  offer  to  be 
accepted  or  rejected  by  the  original  offeror.  A  qualified  accept- 
ance amounts  to  a  rejection  of  the  offer,  which  cannot  there- 
after be  accepted  so  as  to  bind  the  offeror. 

Example  8.  B  offers  his  horse  to  C  for  $150.  C  replies,  "  I  will  take 
the  horse  at  $125."  B  refuses.  C  then  says,  "  I  will  take  him  at  $150." 
B  refuses  this.  C  sues  B  for  breach  of  contract.  C  will  fail.  C's  accept- 
ance at  $125  was  a  rejection  of  the  offer  at  $150,  and  the  offer  was  at 
an  end. 

4.  An  offer  may  be  varied  or  revoked  before  acceptance.  An 
unaccepted  offer  creates  no  legal  rights.  The  offeror  may  vary 
or  revoke  it  at  any  time  before  the  offeree  accepts  it.  If,  how- 
ever, the  offer  is  under  seal,  or  if  the  offeree  has  paid  a  con- 
sideration for  the  option  to  accept  or  reject,  the  offer  is  in  the 
form  of  a  contract  and  cannot  be  varied  or  revoked.  An  accept- 
ance of  the  offer  concludes  the  contract  and  it  is  then  irrevo- 
cable. But  there  must  in  fact  be  an  offer.  Merely  sending  out 
a  circular  of  prices,  or  advertising  prices  in  a  newspaper,  is  not 
an  offer,  but  merely  an  invitation  to  deal  with  the  advertiser. 

Examples :  9.  B  offers  C  his  horse  for  $150  and  gives  C  twenty-four 
hours  in  which  to  accept.  In  an  hour  B  withdraws  his  offer;  but  C,  an 
hour  later,  accepts.  There  is  no  contract.  There  was  no  consideration 
for  B's  promise  to  give  C  twenty-four  hours  to  accept,  and  B  may  revoke 
his  offer  before  C  actually  accepts. 

10.  D  gives  E  an  option  to  take  1000  bushels  of  wheat  on  September  1, 
at  90  cents  a  bushel,  for  which  option  E  pays  D  $40.  D  withdraws  the 
option  before  September  1,  but  on  that  day  E  accepts  and  demands  the 
wheat.     D  is  liable  to  E  for  refusal  to  deliver.    The  offer  is  irrevocable. 

5.  The  offeree  must  have  notice  of  the  revocation.  An  offeree 
may  accept  within  the  time  fixed,  or,  if  none  be  fixed,  within 
a  reasonable  time,  unless  he  has  notice  before  his  acceptance 
that  the  offer  is  revoked.    It  seems  that  the  notice  need  not 


§i5]  PARTIES  19 

necessarily  come  from  the  offeror,  it  being  sufficient  that  the 
offeree  actually  learns  from  any  source  that  the  offer  is  revoked. 

Examples:  11.  B  writes  C,  "  I  will  sell  you  my  horse  for  $150."  The 
next  day  B  writes  C,  "  I  withdraw  the  offer."  The  following  day,  and 
before  receiving  the  letter  containing  the  withdrawal,  C  posts  an  accept- 
ance. The  contract  is  complete,  since  C  had  no  notice  of  the  withdrawal 
before  acceptance,  and  acceptance  is  complete  when  the  letter  is  mailed. 
Revocation  is  not  complete  until  received. 

12.  D  offers  E  his  horse  at  $150  and  gives  E  two  days  to  accept.  The 
next  day  D  sells  the  horse  to  X,  who  tells  E  the  horse  is  his  (X's).  E  then 
accepts.  There  is  no  contract.  E  knew  when  he  accepted  that  the  offer 
had  been  revoked  by  a  sale  to  X. 

6.  An  offer  may  lapse  without  express  revocation.  If  a  time 
is  fixed,  the  expiration  of  the  time  revokes  the  offer.  If  no 
time  is  fixed,  the  offer  lapses  after  the  expiration  of  a  reason- 
able time  ;  what  is  a  reasonable  time  must  depend  upon  the 
circumstances  of  the  case.  An  offer  lapses  by  the  death  of 
either  party. 

Examples  :  13.  On  June  1  B  offers  C  $50  for  a  cow.  C  accepts  the 
offer  on  August  1.  This  is  not  a  reasonable  time  where  the  parties  live 
near  each  other.     Even  a  week  might  be  too  long. 

14.  D  writes  E,  "  I  will  sell  you  my  farm  for  $3000."  Before  E  posts 
his  acceptance  D  dies.  The  offer  is  revoked  by  D's  death.  But  if  E  posts 
his  acceptance  before  D's  death  the  contract  is  binding  upon  D's  estate. 

II.   Competent  Parties 

-  15.  Infants.  An  infant  is  a  person  under  the  age  of  twenty- 
one.  In  many  states  women  become  of  age  at  eighteen,  and 
in  some  they  are  of  age  at  eighteen  or  even  younger,  if  married. 
A  person  attains  his  majority  on  the  day  preceding  his 
twenty-first  birthday,  that  is,  on  the  last  day  of  his  twenty- 
first  year.  If  one's  birthday  is  November  8,  he  can  vote  or 
make  binding  contracts  on  November  7. 

Contracts  made  during  infancy  are  voidable1  at  the  infant's 
option,  exercised  either  during  his  infancy  or  after  he  attains 

1  Tt  is  often  said  that  an  infant's  appointment  of  an  agent  is  void,  — that  is, 
absolutely  of  no  effect,  — but  this  is  so  doubtful  that  the  statement  is  not  made 
in  the  text  (see  sec.  117  post). 


20  FORMATION  OF  CONTRACTS  [Ch.  II 

his  majority,  subject  to  these  exceptions  :  (a)  contracts  for 
necessaries  are  binding ;  (b)  contracts  made  during  infancy  but 
ratified  after  attaining  majority  are  binding.  But  an  infant's 
contracts  are  binding  upon  the  adult  with  whom  they  are  made  ; 
the  infant  alone  can  repudiate  them  at  his  election. 

(a)  Necessaries  include  not  merely  the  things  necessary  to 
sustain  life  but  also  such  additional  articles  as  are  suitable  to 
the  infant's  station  in  life  and  to  his  circumstances  when  pur- 
chased. In  addition  to  food,  lodging,  clothing,  medical  attend- 
ance, and  schooling,  such  articles  as  horses,  watches,  and  jewelry 
have  been  held  to  be  "necessaries"  under  particular  circum- 
stances ;  but  the  courts  are  not  disposed  to  go  beyond  the 
normal  list  of  necessaries.  Even  as  to  those  the  person  who 
furnishes  them  cannot  recover  if  the  infant  was  already  ade- 
quately supplied.  If  one  can  recover  against  an  infant  for 
necessaries,  he  can  recover  only  the  reasonable  value,  not  what 
the  infant  may  have  agreed  to  pay. 

(b)  Ratification  takes  place  when  upon  attaining  his  majority 
the  infant  promises  to  pay,  or  does  an  act  which  is  a  clear  rec- 
ognition of  his  liability.  Some  states  require  a  ratification  to  be 
in  writing,  but  this  is  not  generally  so. 

Examples :  i.  B,  an  infant,  agrees  to  work  for  C  for  a  year  at  $12  a 
month.  He  works  a  month  and  then  quits.  C  has  no  action  against  B  for 
breach  of  contract.     B  may  recover  against  C  for  the  labor  performed. 

2.  Same  contract.  C  discharges  B  at  the  end  of  a  month  without  cause. 
B  has  an  action  against  C  for  breach  of  contract.  The  adult  is  bound 
but  the  infant  is  not. 

3.  D,  an  infant,  purchases  jewelry  of  E  and  presents  it  to  X.  E  cannot 
recover  the  price  from  D.  It  is  immaterial  that  E  thought  D  was  an  adult. 
It  is  immaterial  that  D  represented  that  he  was  of  age,  although  D  might 
in  such  a  case  be  liable  in  tort  for  deceit. 

4.  D  purchases  clothing  for  himself  of  E.  D  is  liable,  provided  E  can 
show  that  D  was  not  adequately  supplied  according  to  his  station  in  life. 
But  although  D  promised  to  pay  $50  for  the  clothing,  E  can  recover  only 
its  actual  value  up  to  $50. 

5.  E  purchases  jewelrv,  not  necessaries,  of  F.  After  attaining  his  majority  E 
promises  to  pay  for  the  jewelry.   E  is  now  liable  upon  the  theory  of  ratification. 

6.  G,  an  infant,  purchases  a  horse  of  H  and  pays  for  it.  G  may  return  the 
horse  during  infancy  or  within  a  reasonable  time  after  attaining  his  majority 
and  recover  the  money.     This  is  disaffirmance,  the  opposite  of  ratification. 


§§i6, 17]  PARTIES  2  1 

7.  Same  purchase.  The  horse  dies.  G  may  recover  his  money  from  H. 
When  an  infant  disaffirms,  die  adult  may  recover  what  he  parted  with,  if  the 
infant  still  has  it ;  but  if  it  is  lost  or  destroyed,  the  adult  is  nevertheless 
bound  to  return  to  the  infant  whatever  he  received  from  him. 

16.  Insane  persons.  If  one  contracts  with  an  insane  person, 
knowing  him  to  be  insane,  the  contract  is  voidable  by  the 
lunatic.  If  one  contracts  with  a  person  who  is  insane  and  who 
has  been  judicially  declared  to  be  so  by  some  competent  judge 
or  other  officer,1  the  contract  is  probably  voidable  by  the  luna- 
tic. If  one  contracts  in  good  faith  with  a  person  not  known 
to  be  insane  but  who  is  so  in  fact,  the  contract  may  be  upheld 
if  it  is  so  far  executed  that  to  avoid  it  would  damage  the  inno- 
cent party;  if,  however,  it  can  be  avoided  and  the  innocent  party 
be  put  in  statu  quo,  the  lunatic  may  avoid  it  even  in  this  case. 

An  insane  person  is,  like  an  infant,  liable  for  necessaries. 
If  he  afterwards  recovers  his  reason,  he  may  ratify  contracts 
made  while  insane. 

Idiots'  contracts  stand  substantially  upon  the  same  footing  as 
the  contracts  of  insane  persons. 

An  intoxicated  person,  if  so  much  intoxicated  as  to  be  unable 
to  understand  and  appreciate  the  nature  of  his  acts,  may  avoid 
a  contract  made  while  in  such  a  condition. 

17.  Married  women.  At  common  law  married  women  were 
incapable  of  making  any  binding  contracts.  Neither  the  mar- 
ried woman  nor  the  other  party  to  the  contract  was  bound ; 
the  contract  was  absolutely  void.  She  could  bind  her  husband, 
not  herself,  upon  a  contract  for  necessaries. 

This  common  law  disability  has  been  largely  removed  by 
statutes.  These  vary  in  the  different  states,  but  in  general  a 
married  woman  may  now  contract  as  fully  as  an  unmarried 
woman,  except  that  a  married  woman  cannot,  in  some  states, 
contract  with  her  husband  or  as  surety  for  her  husband.  These 
statutes  are  too  numerous  to  be  further  considered. 

1  Statutes  provide  methods  by  which  persons  suspected  of  insanity  may  be 
brought  before  a  court  and  the  matter  judicially  determined.  A  judgment  of 
insanity  is  constructive  notice  to  all  the  world  of  the  fact  of  insanity.  The  insane 
person's  property  is  then  under  the  control  of  a  guardian  or  committee  appointed 
by  the  court. 


22  FORMATION  OF  CONTRACTS  [Ch.  II 


III.  Consideration 

18.  Necessity  of  consideration.  Save  in  the  case  of  sealed  con- 
tracts (and  now  in  many  states  even  as  to  these),  every  promise 
contained  in  a  contract  must  rest  upon  a  consideration  in  order 
to  be  enforceable.  A  contract  not  under  seal  is  called  a  simple 
contract.  A  sealed  contract  is  sometimes  called  a  deed  or  a 
specialty;  if  for  the  payment  of  money,  it  is  often  called  a  bond. 

Consideration  consists  in  some  legal  detriment  suffered  by 
the  promisee  relying  upon  the  promise,  and  there  is  usually 
some  corresponding  benefit  to  the  promisor.  Unless  such  con- 
sideration can  be  shown  by  the  promisee  he  cannot  enforce 
the  promise  against  the  promisor.  Hence  gratuitous  promises 
are  unenforceable.  A  mere  moral  obligation  to  do  a  thing  is 
not  a  consideration  for  a  promise  to  do  it. 

In  negotiable  instruments  the  law  presumes  consideration, 
but  the  promisor  may  show  that  none  in  fact  exists. 

At  common  law  sealed  instruments  require  no  considera- 
tion. Many  states  by  statute  now  provide  that  in  sealed 
instruments  there  must  be  a  consideration,  but  make  the  seal 
presumptive  evidence  that  there  is  one,  leaving  the  promisor  to 
show,  if  he  can,  that  there  was  none. 

Examples :  i.  A  father  makes  and  presents  to  his  son  a  negotiable 
promissory  note  as  a  gift.  The  son  cannot  enforce  it  if  the  father  sets  up 
want  of  consideration  as  a  defense. 

2.  The  son  negotiates  the  note  before  maturity  to  X,  who  pays  the  son 
for  it  in  good  faith.  X  may  enforce  it  against  the  father  because  X  has 
suffered  a  legal  detriment  in  parting  with  his  money,  relying  upon  the 
father's  promise  (see  sec.    104  posf). 

3.  A  father  says  to  his  son,  "  I  will  give  you  $500  if  you  refrain  from 
smoking  until  you  are  twenty-one."  The  son  refrains.  He  may  enforce  the 
promise.  He  has  suffered  a  legal  detriment  in  doing  what  he  was  not 
legally  bound  to  do. 

4.  B  promises  C  that  he  will  repair  C's  watch  free  of  charge.  He  after- 
wards refuses  to  do  so.  C  has  no  remedy.  There  is  no  consideration  for 
B's  promise. 

5.  Same  promise.  B  undertakes  the  repairs  and  does  them  so  badly  as 
to  ruin  the  watch.  B  is  liable  to  C  for  gross  negligence.  C  suffers  a  legal 
detriment  in  parting  with  his  watch. 


§  1 9]  CONSIDERATION  23 

19.  The  consideration  need  not  equal  the  promise  in  value.  The 
law  allows  persons  to  affix  their  own  value  to  acts  or  forbear- 
ances. If  the  promisee  does  or  forbears  anything  he  is  not 
bound  to  do  or  forbear,  there  is  sufficient  consideration.  But 
if  the  promisee  does  or  forbears  something  he  is  already  bound 
to  do  or  forbear,  there  is  no  consideration.  The  problem  in 
many  cases  is  whether  the  promisee  has  done  or  forborne  what 
he  was  not  under  a  legal  obligation  to  do  or  forbear.  Such 
cases  will  be  considered  in  concrete  examples. 

Examples :  1.  John  Doe  promises  Richard  Roe  that  if  Roe  will  name 
his  child  after  John  Doe,  the  latter  will  pay  Roe  (or  the  child)  $1000.  Roe 
names  the  child  after  Doe.  He  may  recover  the  $1000.  He  has  done  what 
he  was  not  legally  bound  to  do. 

2.  B  agrees  to  pay  C  $200  for  a  buggy  worth  but  $50.  C  agrees  to 
deliver  the  buggy  to  B  for  f.200.  C  may  recover  the  $200.  C  makes  a 
promise  which  he  is  not  bound  to  make,  and  which  B  may  enforce  against 
him,  and  this  is  a  consideration  for  B's  promise. 

3.  F  has  a  horse  belonging  to  E  which  he  wrongfully  refuses  to  deliver 
up.  E  promises  F  $50  if  he  will  deliver  it  and  F  does  deliver  it.  F  cannot 
recover  the  $50.    He  has  merely  done  what  he  was  legally  bound  to  do. 

4.  (Successive  promises.}  G  contracts  to  dig  a  well  for  H  for  $60.  When 
down  a  few  feet,  G  strikes  rock  and  refuses  to  go  on.  H  promises  G  an 
extra  $25  if  he  will  finish  the  well,  (a)  Some  courts  say  G  cannot  recover 
the  extra  $25  because  he  merely  did  what  he  was  already  bound  to  do. 
(b)  Some  courts  say  G  was  not  bound  to  go  on  because  he  had  an  option 
to  stop  and  pay  damages  for  the  breach  of  contract,  and  that  G  therefore 
did  what  he  could  not  be  legally  compelled  to  do.  (c)  Some  courts  say  that 
the  old  contract  was  by  agreement  rescinded  and  a  new  one  for  $85  was 
made.  This  case  illustrates  how  conflicts  of  judicial  decisions  grow  up  where, 
as  in  our  country,  we  have  so  many  courts  independent  of  each  other. 

5.  {Payment  of  smaller  sum.}  K  owes  L  $  100.  L  says,  "  If  you  will  pay 
me  $60,  I  will  release  the  other  $40."  K  pays  the  $60.  L  may  also  recover 
the  other  $40.  The  payment  of  a  smaller  sum  in  satisfaction  of  a  larger  is 
not  a  sufficient  consideration  to  support  a  promise  to  release  the  balance, 
because  K  is  already  legally  bound  to  pay  the  $60.  But  if,  by  agreement, 
K  also  gives  L  a  jackknife,  he  has  done  what  lie  was  not  legally  bound  to 
do,  and  the  $40  claim  is  discharged. 

6.  (Composition  with  creditors?)  M  owes  various  creditors  A,  B,  C,  etc. 
M  agrees  to  pay  each  60  per  cent  of  his  claim,  provided  he  and  all  others 
will  release  M  from  the  balance  ;  they  all  agree  to  do  this.  M  pays  each 
60  per  cent.  A  afterwards  sues  M  for  the  remaining  40  per  cent  of  his 
claim.     A   cannot  recover.     This  is  called  a  composition   with  creditors. 


24  FORMATION  OF  CONTRACTS  [Ch.  II 

The  reasons  given  for  upholding  it  are  not  consistent,  but  it  is  often  said 
to  be  an  exception  based  upon  the  policy  of  encouraging  such  compositions 
and  upon  the  policy  of  forbidding  one  creditor  to  recover  more  when  by  a 
kind  of  mutual  arrangement  all  have  consented  to  take  the  same  percentage. 
7.  (Mutical  subscriptions.)  The  X  church  is  raising  money  for  a  new  bell. 
A,  B,  C,  etc.,  each  subscribe  the  sum  set  opposite  their  names.  May  these 
promises  be  enforced?  Is  there  any  consideration  for  them?  (#)  Some 
courts  say  there  is  none  unless  the  X  church  has  acted  upon  the  promises 
by  purchasing  a  bell  or  contracting  for  one.  (5)  Other  courts  think  the 
promises  mutually  support  each  other,  and  that  B  subscribes  in  considera- 
tion of  A's  subscription,  etc.  (c)  Other  courts  think  the  X  church  by 
accepting  the  promises  agrees  to  execute  the  plan,  and  that  this  promise  is 
the  consideration  for  the  promises  of  the  subscribers.  Here,  again,  we  have 
a  conflict  of  authority  upon  a  difficult  question  of  law. 

20.  A  past  consideration  will  not  support  a  promise.  A  past 
consideration  is  one  performed  or  finished  by  B  without  request 
and  before  any  promise  is  given  by  C.  If  C  should  afterwards 
promise  something  to  B  by  way  of  compensation  or  reward  for 
the  benefit  conferred  by  B's  act,  this  promise  would  rest  upon 
a  past  consideration  and  would  be  unenforceable. 

Exatnplcs  :  1.  B  without  C's  knowledge  or  request  moves  a  stack  of  hay 
standing  on  C's  farm  in  order  to  save  it  from  a  spreading  fire.  When  C 
learns  of  this,  he  promises  to  pay  B  for  his  time  and  trouble.  This  promise 
is  unenforceable  because  it  rests  upon  a  past  consideration. 

2.  D  finds  a  lost  article  and  returns  it  to  C,  the  owner.  C  promises  to 
pay  D  a  certain  sum  by  way  of  reward.  D  cannot  recover  upon  this  prom- 
ise ;  it  rests  upon  a  past  consideration. 

To  this  rule  there  are  certain  apparent  exceptions. 

(a)  If  there  is  a  request  by  C  that  B  move  the  stack  or  that  D 
search  for  the  lost  article,  the  law  implies  a  promise  to  pay  for 
the  service ;  and  when  C  expressly  promises  to  pay  he  is  merely 
confirming  the  implied  promise,  and  his  expressed  promise  is 
substituted  for  the  implied  one  and  is  enforceable. 

(b)  If  there  is  some  legal  bar  to  enforcing  a  contract  against 
C,  which  he  may  set  up  or  not,  he  may  under  certain  circum- 
stances, by  a  subsequent  promise,  render  himself  liable  on  such 
a  contract  notwithstanding  the  bar.  Such  legal  bars  are  infancy, 
or  the  Statute  of  Limitations,  or  discharge  in  bankruptcy,  and 
the  like. 


§§2i,22]  FORM  25 

Examples :  3.  B,  an  infant,  purchases  jewels  of  C.  When  B  arrives  at 
his  majority  he  promises  to  pay  for  them.  B  is  liable  to  C.  Some  say  B's 
promise  rests  upon  the  past  consideration,  that  is,  the  delivery  of  the  jewels, 
and  that  C  suffers  no  detriment  relying  upon  the  new  promise.  Others 
treat  B's  promise  merely  as  a  waiver  of  his  plea  of  infancy,  and  thus  escape 
the  difficulties  of  consideration. 

4.  D  owes  E  a  debt  which  is  barred  by  the  Statute  of  Limitations,  that 
is,  a  statute  providing  that  an  action  for  debt  or  breach  of  contract  must 
be  begun  within  a  certain  time  (usually  six  years).  If  E  sues  D,  the  latter 
may  plead  the  statute  and  escape.  But  after  the  debt  is  barred  D  promises 
to  pay  it.  D  is  now  liable.  The  case  is  practically  the  same  as  that  of  the 
infant. 

5.  F  owes  G  a  sum  of  money.  Without  any  new  consideration,  F  gives 
G  a  chattel  mortgage  or  other  security.  The  chattel  mortgage  is  enforce- 
able. The  antecedent  debt,  although  a  past  consideration,  is  sufficient  to 
support  it. 

21.  The  consideration  must  be  legal.  Illegal  contracts  will  be 
dealt  with  later.  It  is  enough  to  say  here  that  if  A's  promise 
rests  upon  a  counter  promise  or  an  act  of  B's  which  is  illegal, 
then  A's  promise  cannot  be  enforced.  Thus,  A  promises  to 
pay  B  a  sum  of  money  if  B  will  purloin  a  document  from  C. 
B  purloins  the  document.  He  cannot  recover  the  sum  promised 
because  his  act  constituting  the  consideration  is  illegal.  So, 
also,  promises  to  pay  money  lost  in  gambling  are  unenforce- 
able because  all  gambling  or  wagering  contracts  are  illegal. 


IV.   Form  :  Writing  ;  Seal 

22.  Statute  of  Frauds.  The  Statute  of  Frauds  (so  called 
because  it  was  intended  to  prevent  fraud  and  perjury  in  the 
proving  of  contracts  before  the  courts)  was  enacted  by  the 
English  Parliament  in  1676  and  has  been  substantially  reen- 
acted,  in  whole  or  in  part,  by  most  of  the  American  states. 
Two  sections  of  this  statute,  the  fourth  and  the  seventeenth, 
are  those  that  deal  particularly  with  contracts. 

1.  Fourth  section.  The  fourth  section  provides  in  substance 
that  in  order  to  be  enforceable  the  following  contracts,  or  some 
note  or  memorandum  of  them,  shall  be  in  writing  and  signed 


26  FORMATION  OF  CONTRACTS  [Ch.  II 

by  the  party  to  be  charged  (that  is,  the  one  against  whom  it 
is  sought  to  enforce  the  contract)  or  by  his  authorized  agent : 

(a)  the  promise  of  an  executor  or  administrator  to  pay  out 
of  his  own  estate  that  which  is  due  from  the  estate  he  is 
administering ; 

(b)  the  promise  to  answer  for  the  debt,  default,  or  mis- 
carriage of  another,  that  is,  to  be  surety  that  another  will 
pay  his  debts  or  discharge  any  of  his  legal  obligations  (see 
chap,  viii)  ; 

(c)  the  promise  to  do  anything,  as  transfer  property,  in 
consideration  of  marriage,  that  is,  where  the  marriage  is  the 
consideration  for  such  promise  ; 

(d)  any  contract  or  sale  of  lands,  or  any  interest  in  or  con- 
cerning lands  (though  in  the  United  States  generally  leases 
for  less  than   one  year  are  excepted)  ; 

(e)  any  contract  which  by  its  terms  is  not  to  be  performed 
within  the  space  of  one  year  from  the  time  of  the  making 
thereof ;  but  if  it  may  be  fully  performed  within  one  year  it 
does  not  require  a  writing. 

It  must  be  observed  that  this  requirement  is  in  addition  to 
all  other  requirements.  All  contracts  require  a  true  agree- 
ment, competent  parties,  and  consideration.  These  contracts 
require  all  those  things  and  also  a  writing  duly  signed.  Most 
contracts  may  be  proved  by  parol  evidence ;  these  contracts 
may  be  proved  only  by  a  writing.  The  writing  may  be  a  mere 
memorandum  stating  the  chief  points  in  the  agreement,  or  it 
may  even  consist  of  a  series  of  letters  so  connected  as  to  make 
together  a  complete  memorandum.  Careful  persons  will  make 
a  full  memorandum,  being  particular  to  name  the  parties,  the 
subject-matter,  the  consideration,  the  terms  and  conditions, 
and  to  have  this  memorandum  signed  by  both  parties  to  the 
contract.  If  the  writing  fails  to  state  any  essential  term,  it  is 
unenforceable,  for  that  term  would  have  to  be  proved  by  parol 
evidence,  and  the  statute  forbids  this. 

In  many  states  additional  contracts  requiring  a  writing  are 
enumerated,  as,  for  example,  a  promise  to  pay  a  debt  dis- 
charged in  bankruptcy,  a  promise  to  pay  a  debt  barred  by  the 


§22]  FORM  27 

Statute  of  Limitations,  a  promise  after  arriving  at  majority  to 
pay  a  debt  contracted  during  infancy,  the  acceptance  of  a  bill 
of  exchange,  a  fire  insurance  policy,  a  limited  partnership,  a 
common  law  marriage,  and  many  others.  Whether  a  particular 
contract  must  be  in  writing  in  a  given  state  can  be  ascertained 
only  after  a  careful  examination  of  the  statutes  of  that  state. 

2.  Seventeenth  section.  The  seventeenth  section  of  the 
Statute  of  Frauds  provides  that  a  contract  for  the  sale  of 
goods,  wares,  and  merchandise  (that  is,  any  personal  property) 
of  the  value  of  ten  pounds  or  upwards  shall  be  unenforceable 
unless  the  buyer  accepts  part  of  the  goods  so  sold  and  actually 
receives  the  same,  or  gives  something  in  earnest  to  bind  the 
bargain  or  in  part  payment,  or  there  be  a  note  or  memorandum 
in  writing  signed  by  the  party  to  be  charged  or  by  his  authorized 
agent. 

It  will  be  observed  that  a  contract  to  sell  land  can  be  evi- 
denced in  only  one  way,  namely,  by  a  writing,  while  a  contract 
to  sell  goods  of  the  value  of  $50  or  more  may  be  evidenced  in 
any  one  of  three  ways,  namely,  by  a  receipt  of  the  goods  or  a 
part  of  them,  by  a  part  payment  of  the  price  or  payment  of 
"  earnest  money,"  and  by  a  writing.  States  differ  as  to  the 
value  below  which  no  special  form  is  required.  Some  fix  it  as  low 
as  $30,  and  one  as  high  as  $2500.  Several  states  do  not  have  this 
portion  of  the  statute  at  all.1  In  these  states  a  contract  to  sell 
goods,  no  matter  of  what  value,  may  be  proved  by  parol  although 

1  It  is  not  found  in  Alabama,  Delaware,  Illinois,  Kansas,  Kentucky,  Louisiana, 
New  Mexico,  North  Carolina,  Pennsylvania,  Tennessee,  Texas,  Virginia,  West 
Virginia. 

In  the  following  states  the  sum  is  fixed  at  $30  :  Arkansas,  Maine,  Missouri. 

In  New  Hampshire  it  is  fixed  at  $33 ;  in  Vermont  at  $40. 

In  the  following  states  it  is  fixed  at  $50:  Alaska,  Colorado,  District  of  Colum- 
bia, Georgia,  Indiana,  Maryland,  Michigan,  Minnesota,  Mississippi,  Nebraska, 
Nevada,  New  York,  North  Dakota,  Oklahoma,  Oregon,  South  Carolina,  South 
Dakota,  Washington,  Wisconsin,  Wyoming. 

In  Connecticut  and  Hawaii  it  is  fixed  at  $100. 

In  California,  Idaho,  Montana,  and  Utah  it  is  fixed  at  $200. 

In  Arizona,  Massachusetts,  New  Jersey,  and  Rhode  Island  it  is  fixed  at  $500. 

In  Ohio  the  sum  is  fixed  at  $2500. 

In  the  following  a  contract  for  the  sale  of  goods  of  any  value,  however  small, 
must  conform  to  the  statute  :  Florida,  Iowa. 


28  FORMATION  OF  CONTRACTS  [Ch.  II 

there  has  been  neither  delivery  nor  payment.  It  is  generally 
thought  that  the  statute  as  to  the  sale  of  goods  has  outlived  its 
usefulness  and  should  be  everywhere  repealed  as  an  unnecessary 
restraint  upon  commerce. 

It  is  difficult  at  times  to  say  whether  a  sale  is  of  real  prop- 
erty or  of  personalty.  The  sale  of  standing  trees  to  be  cut  by 
the  buyer  is  generally  held  to  be  a  sale  of  realty  ;  but  if  the 
seller  is  to  cut  them,  the  contract  contemplates  that  they  shall 
be  personal  property  when  delivered  to  the  buyer.  Growing 
annual  crops,  known  as  emblements,  are  considered  personalty, 
while  fruits,  grass,  and  other  perennials  are  held  to  be  in  the 
same  class  as  trees. 

23.  Contracts  under  seal.  Any  contract  may  be  made  in  writ- 
ing under  seal.  Conveyances  of  land  must  be  by  deed,  that  is, 
under  seal.  Statutes  may  require  other  contracts  or  convey- 
ances to  be  sealed,  but  the  modern  tendency  is  to  decrease 
rather  than  magnify  the  importance  of  the  seal.  An  unsealed 
contract  is  called  a  simple  contract. 

A  seal  at  common  law  was  an  impression  on  wax  or  other 
adhesive  substance  affixed  to  the  document  to  be  sealed.  In 
the  Middle  Ages,  when  few  persons  could  write,  each  important 
person  had  his  own  seal  or  signet  which  took  the  place  of  his 
signature.  In  modern  times  a  mere  scroll  with  the  pen  is 
declared  by  statute,  in  most  states,  to  be  a  sufficient  seal.  The 
commonest  form  is  to  write  the  word  "  seal  "  after  the  name 
and  make  a  rough  circular  scroll  around  it  with  the  pen. 

While  very  few  contracts  must  bear  a  seal,  any  contract  may 
bear  one.  If  a  contract  is  sealed,  it  has  certain  characteristics 
which  it  would  not  have  if  it  were  unsealed.  Chief  among  these 
are  the  following. 

I.  At  common  law  the  contract  under  seal  does  not  require 
any  consideration.  For  example,  a  father  promises  under  seal 
to  pay  his  son  one  thousand  dollars,  this  being  merely  a  gift 
without  consideration.  Such  an  instrument  is  called  a  bond 
and  is  enforceable.  Were  such  promise  made  in  an  unsealed 
instrument,  the  son  could  not  enforce  it  for  want  of  considera- 
tion.   Were  it  made  in  a  negotiable  promissory  note,  the  son 


§  23]  FORM  29 

could  not  enforce  it;  but  if  he  negotiated  it  to  another  person 
who  paid  value  and  had  no  notice  of  the  absence  of  considera- 
tion, the  transferee  could  enforce  it. 

By  statute  in  many  states  the  common  law  rule  upon  this  point  has  been 
changed  and  the  seal  is  made  merely  presumptive  evidence  of  consideration  ; 
that  is,  it  dispenses  with  the  necessity  of  the  proving  of  consideration  by  the 
one  who  seeks  to  recover  upon  the  instrument,  but  it  leaves  the  defendant 
free  to  prove  that  there  was  no  consideration  and  thus  to  defeat  the  instru- 
ment. Even  this  statutory  provision  has  not,  however,  succeeded  everywhere 
in  depriving  the  seal  of  its  importance  as  a  substitute  for  consideration.  Some 
courts  have  held  that  if  the  seal  is  used  expressly  to  give  validity  to  a 
gratuitous  promise,  it  will  be  effective  for  that  purpose  notwithstanding  the 
statute ;  but  if  it  is  used  in  a  contract  where  a  consideration  was  intended 
but  has  failed,  the  defendant  notwithstanding  the  seal  may  prove  that  there 
is  no  consideration  and  thus  defeat  the  contract.  Under  this  holding,  a 
bond  to  give  money  without  consideration  would  be  good,  while  a  bond  to 
pay  money  for  services  to  be  rendered  would  not  be  enforceable  in  case  the 
consideration  failed,  that  is,  the  services  were  not  rendered. 

In  a  few  states  a  sealed  contract  is  by  statute  put  upon  precisely  the  same 
basis  as  an  unsealed  contract,  that  is,  seals  are  practically  abolished. 

2.  Only  the  parties  to  a  sealed  instrument  may  sue  or  be 
sued  upon  it.  In  an  action  upon  an  unsealed  contract  it  may 
be  shown  that  a  party  named  is  in  fact  an  agent  for  a  party 
unnamed,  and  the  latter  may  sue  or  be  sued  upon  such  unsealed 
contract. 

3.  A  right  of  action  upon  a  sealed  contract  is  not  usually 
barred  so  soon  by  the  Statute  of  Limitations  as  an  action  upon 
a  simple  contract.  The  period  allowed  upon  a  sealed  contract 
varies  in  the  different  states  from  ten  to  twenty  years,  while 
the  period  allowed  upon  a  simple  contract  is  usually  not  more 
than  six  years. 

Examples:  1.  "  I  promise  to  pay  John  H.  Blackheath  one  thousand 
dollars  on  February  io,  1906.  William  Blackheath."  This  is  a  simple 
contract  to  pay  money  ;  if  made  as  a  gift,  no  one  can  enforce  it. 

2.  "  I  promise  to  pay  to  John  H.  Blackheath,  or  order,  one  thousand 
dollars  on  February  10,  1906.  William  Blackheath."  This  is  a  negoti- 
able promissory  note.  If  made  as  a  gift,  John  cannot  enforce  it;  but  he 
could  negotiate  it  to  another  person  who  might  enforce  it. 

3.  Know  all  men  by  these  presents  :  That  I.  William  Blackheath. 
am  held  and  firmly  bound  unto  John  H.  Blackheath  in  the  sum  of  one 


3<D  FORMATION  OF  CONTRACTS  [Ch.  II 

thousand  dollars  to  be  paid  to  the  said  John  H.  Blackheath,  his  executors, 

administrators,  or  assigns,  on  February  10,  1906;  to  which  payment  I  bind 

myself,  my  executors  and  administrators  by  these  presents. 

Witness  my  hand  and  seal  this  tenth  day  of  February,  one  thousand  nine 

hundred  and  five.  , 

William  Blackheath.     [Seal] 

This  is  a  bond.  Although  made  as  a  gift,  John  may  enforce  it  at  com- 
mon law. 

V.   Legality  of  Object 

24.  Contracts  made  illegal  by  statute.  The  statutes  may- 
declare  a  contract  to  be  illegal,  may  prohibit  it,  or  may  simply 
penalize  it.  It  is  a  question  of  construction  whether  prohibited 
and  penalized  contracts  are  illegal. 

1.  Certain  contracts  are  declared  by  statute  to  be  illegal. 
Such  are  contracts  for  gambling  or  wagering,  contracts  for 
usury,  in  some  states  contracts  for  work  labor  or  any  unneces- 
sary act  to  be  performed  on  Sunday,  and  in  some  states  any 
contract  made  on  Sunday  even  though  performance  is  to  be 
made  on  a  secular  day. 

2.  Certain  acts  are  prohibited  by  statute.  A  contract  to 
perform  a  prohibited  act,  or  involving  such  an  act,  would  be 
an  illegal  contract. 

Example  1.  The  statute  prohibits  prize  fighting.  A  contract  to  engage 
in  a  prize  fight  is  illegal.  Again,  the  statute  prohibits  any  person  from 
engaging  in  the  practice  of  medicine  without  first  obtaining  a  license.  An 
unlicensed  physician  cannot  recover  compensation  for  professional  services. 
A  teacher  cannot  recover  for  his  services  in  a  public  school  unless  he  is 
duly  licensed. 

3.  Certain  acts  are  penalized  by  statute  but  are  not  in  terms 
prohibited.  In  such  cases  it  is  a  question  of  construction 
whether  a  contract  to  do  the  act  is  illegal. 

Examples:  2.  The  statute  provides  that  any  one  who  sells  a  lot  in  a 
plat  in  any  city  without  first  recording  the  plat  in  the  appropriate  public 
office  shall  pay  a  penalty  of  $50  for  each  offense.  A  sells  B  a  lot  in  an 
unrecorded  plat.  B  afterwards  refuses  to  take  the  lot  and  pay  the  purchase 
price.  Is  the  contract  of  sale  of  this  lot  an  illegal  contract?  It  has  been 
held  not,  because  the  court  thought  it  was  not  the  object  of  the  statute  to 


§^5]  LEGALITY  31 

prohibit  such  sales  but  merely  to  make  it  so  expensive  to  deal  in  lots  in 
unrecorded  plats  that  landowners  would  be  induced  to  record  the  plats. 

3.  The  statute  fixes  a  penalty  for  the  sale  of  adulterated  foods.  15  sells 
to  C  a  quantity  of  adulterated  foods.  C  is  not  bound.  He  may  refuse  to 
take  the  goods  and  pay  the  price  on  the  ground  that  B's  contract  is  illegal. 
The  intent  of  the  statute  is  to  prevent  the  sale  of  adulterated  goods. 

25.  Wagering  contracts.  A  wagering  contract  is  an  agreement 
to  give  money  or  property  upon  the  determination  or  ascertain- 
ment of  an  uncertain  event.  The  consideration  for  such  promise 
may  be  either  a  like  promise  or  something  given  outright. 

Examples :  1.  A  and  B  contract  that  if  A's  horse  wins  a  race  with  B's 
horse,  B  shall  pay  A  $100 ;  but  if  B's  horse  wins,  A  shall  pay  B  $100. 

2.  A  promises  to  pay  B  $100  in  case  B's  horse  wins,  provided  B  pay  A 
in  hand  $20.  If  B's  horse  wins,  A  would  pay  B  $100  and  would  be  $80  out 
of  pocket ;  if  B's  horse  loses,  A  has  his  $20  and  B  is  that  much  out  of 
pocket. 

3.  A,  B,  C,  etc.,  each  pay  an  entrance  fee  as  a  condition  of  competing 
for  a  purse  or  prize  at  a  horse-racing  contest.  This  is  not  a  wager  unless 
the  competitors  are  the  sole  contributors  to  the  purse  and  thus  practically 
bet  each  against  the  others,  or  unless  this  form  is  adopted  as  a  subterfuge 
to  conceal  a  wager. 

It  seems  that  by  the  common  law  of  England  wagering 
contracts  were  not  illegal.  Judges  later  regretted  that  the  law 
was  not  otherwise,  and  became  very  astute  in  finding  reasons 
for  holding  particular  wagers  illegal,  as,  for  example,  that  a 
wager  on  the  life  of  Napoleon  was  illegal  because  it  gave  one 
wagerer  an  interest  in  keeping  the  king's  enemy  alive  and  the 
other  an  interest  in  compassing  his  death  by  means  other  than 
lawful  warfare.  But  even  with  such  refinements  as  these  the 
courts  felt  bound  to  enforce  many  wagers.  In  New  York 
wagers  were  held  to  be  legal.  In  Massachusetts,  however,  the 
courts  refused  to  follow  the  English  rule  and  held  them  to  be 
illegal.  Now,  by  statute,  they  are  generally  declared  to  be  il- 
legal in  all  jurisdictions. 

Wagers  on  the  rise  and  fall  of  prices.  The  form  of  this 
wager  is  that  one  party  sells  another  grain  or  stock  for  future 
delivery  at  a  specified  price  ;  but  in  fact  neither  party  intends 
an  actual  delivery,  and  bo<"h  intend  to  settle  on  the  delivery  day 


32  FORMATION  OF  CONTRACTS  [Ch.  II 

the  difference  between  the  contract  price  and  the  market  price 
in  money.  It  is  equivalent  to  betting  that  the  market  price  on 
a  certain  day  will  be  so  much.  Often  these  take  the  form  of 
"  options  "  as  well  as  "futures,"  that  is,  A  sells  B  the  option  to 
call  for  wheat  on  a  certain  day  at  a  certain  price,  or  A  sells  B 
the  option  to  deliver  wheat  on  that  day  at  a  certain  price,  or  A 
may  sell  B  the  option  to  call  at  one  price  or  deliver  at  another ; 
the  first  is  termed  a  "call,"  the  second  a  "put,"  and  the  third 
a  "spread"  or  a  "straddle."  Whenever  the  intent  is  merely 
to  settle  the  gain  or  loss  in  money,  and  there  is  no  intent  to 
deliver  or  receive  the  article  itself,  the  transaction  is  a  gambling 
contract  and  illegal. 

Examples :  4.  "I  have  sold  John  Doe  100  shares  of  stock  in  the  X.Y. 
Co.  at  85  per  cent,  payable  and  deliverable  at  seller's  option  in  30  days, 
Richard  Roe."  This  maybe  a  valid  contract  giving  the  seller  the  right  to 
deliver  the  stock  at  any  time  within  30  days  at  $85  a  share  (par  value  $100)  ; 
or  it  may  be  intended  that  on  any  day  when  that  stock  is  worth  say  $80  a 
share,  the  transaction  shall  be  closed  by  the  buyer  paying  the  seller  $500. 
The  transaction  must  be  closed  at  the  end  of  30  days,  if  not  closed  earlier. 

5.  "  For  value  received  the  bearer  may  call  on  me  for  10,000  bushels  of 
wheat  at  70  cents  a  bushel  on  Sept.  1,  1905.  Richard  Roe."  This  is  a 
"call."  The  buyer  on  September  1  will  "  call"  for  the  wheat  if  it  is  more 
than  70  cents  a  bushel,  but  not  if  it  is  less.  If  it  is  more,  he  makes  the 
excess,  less  what  he  paid  for  the  option  ;  if  it  is  less,  he  loses  what  he  paid 
for  the  option.  When  the  differences  are  intended  to  be  settled  in  money 
this  is  a  gambling  contract,  but  is  perfectly  valid  if  actual  delivery  is 
intended. 

6.  "  For  value  received  the  bearer  may  deliver  to  me  10,000  bushels  of 
wheat  at  70  cents  a  bushel  on  Sept.  1,  1905.  Richard  Roe."  This  is  a 
"  put."  If  wheat  is  60  cents  a  bushel  on  September  1,  the  seller  will  "  put" 
it  on  Roe,  who  must  pay  10  cents  a  bushel  to  the  seller.  The  latter  thereby 
makes  $1000,  less  what  he  paid  for  the  option.  If  it  is  more  than  70  cents  a 
bushel,  the  seller  will  not  "put  "  it,  and  he  loses  what  he  paid  for  the  option. 
But  this  contract  is  valid  if  actual  delivery  is  intended. 

7.  "  For  value  received  the  bearer  may  call  on  me  for  10,000  bushels  of 
wheat  at  80  cents  a  bushel  any  time  in  60  days  from  date ;  or  the  bearer  may, 
at  his  option,  deliver  the  same  to  me  at  75  cents  a  bushel.  Richard  Roe." 
This  is  a  "  spread."  If  the  call  and  put  prices  were  the  same,  it  would 
be  a  "straddle."  If  actual  delivery  is  intended  (as  it  rarely  is),  this  would 
be  a  valid  contract.  But  if  it  is  intended  to  settle  gains  or  losses  in  money, 
it  is  a  gambling  contract. 


§26]  LEGALITY  33 

Insurance.  Insurance  was  at  one  time  a  favorite  wagering 
contract.  Thus  persons  not  at  all  interested  in  a  ship  or  its 
cargo  would  take  out  insurance  upon  it,  in  order  that  if  it  was 
lost  they  might  recover  the  amount  named  in  their  policies. 
Very  often  insurance  was  taken  upon  lives  in  which  the  policy 
holder  had  no  interest.  This  is  in  general  made  illegal  by 
statute.  In  order  that  an  insurance  policy  may  be  legal,  the 
one  insured  must  have  some  insurable  interest  in  the  property 
or  the  life  covered  by  the  policy.  Even  in  such  cases  the 
insurance  contract  is  a  kind  of  wagering  contract,  but  it  is  one 
permitted  by  the  policy  of  the  law. 

26.  Contracts  illegal  at  common  law.  The  common  law  has 
indicated  a  very  considerable  number  of  instances  in  which 
it  will  regard  contracts  as  illegal  because  contrary  to  public 
policy.    Only  a  few  of  them  can  be  enumerated. 

1.  Contracts  to  commit  crimes  or  civil  wrongs  (torts)  are 
illegal.  Thus,  a  contract  to  commit  an  assault  would  be  illegal 
for  both  reasons,  since  an  assault  is  both  a  crime  and  a  tort. 

2.  Contracts  to  do  acts  which  injure  the  public  service  or 
interfere  with  the  administration  of  justice  are  illegal.  A  con- 
tract to  obtain  a  public  office  or  vote  for  another  for  office,  to 
influence  legislative  action  by  "lobbying,"  to  quiet  competition 
for  public  contracts,  to  stifle  the  prosecution  for  a  public  offense, 
to  carry  on  a  suit  as  an  attorney  at  the  expense  of  the  attorney 
and  share  the  proceeds  (champerty),  to  suborn  witnesses,  and 
the  like,  are  all  illegal. 

3.  Contracts  which  affect  the  freedom  or  security  of  marriage 
are  illegal.  Such  is  a  contract  to  procure  a  collusive  divorce ; 
and  such  is  a  marriage  brokerage  contract,  that  is,  a  contract 
by  A  to  procure  or  bring  about  a  marriage  between  B  and  C  for 
a  consideration  paid  or  to  be  paid  by  either  B  or  C  to  A. 

4.  Contracts  in  restraint  of  trade  may  be  legal  or  illegal 
according  as  the  restraint  is  reasonable  or  unreasonable.  Such 
a  contract  is  reasonable  when  it  is  reasonably  necessary  to 
protect  the  promisee  in  a  business  not  involving  a  public 
franchise  or  "  impressed  with  a  public  trust."  Beyond  this  point 
it  is  unreasonable  and  illegal. 


34  FORMATION  OF  CONTRACTS  [Ch.  II 

Examples :  I.  A  buys  B's  retail  shoe  store  in  the  city  of  Ithaca,  and  B 
agrees  not  to  engage  again  in  the  shoe  trade  in  Ithaca.  This  is  reasonably 
necessary  to  protect  A  against  B's  competition,  and  is  held  to  be  not  so 
injurious  to  the  public  as  to  render  it  against  public  policy.  If  B  agrees 
not  to  engage  in  the  retail  shoe  trade  in  the  state  of  New  York,  this  would 
be  obviously  a  greater  restraint  than  is  reasonably  necessary  and  would  be 
illegal.  If  he  agrees  not  to  engage  in  the  retail  shoe  trade  in  the  county  in 
which  Ithaca  is  situated,  this  might  be  reasonable  or  unreasonable  according 
to  circumstances.  Some  states  hold  any  restraint  which  includes  the  whole 
of  the  state  to  be  unreasonable,  but  this  is  contrary  to  modern  tendencies. 

2.  The  maker  of  guns  and  heavy  ordnance  of  which  governments  were 
the  chief  purchasers  sold  his  business  and  agreed  that  for  twenty-five  years 
he  would  not  engage  in  a  like  business  anywhere  in  the  world.  It  was  held 
by  the  English  court  that  this  restraint  was  reasonably  necessary  to  protect 
the  purchaser,  since  a  manufactory  of  such  guns  anywhere  in  the  world 
would  be  a  competitor. 

3.  If  the  business  is  one  carried  on  under  a  public  franchise  (as  a  fran- 
chise to  lay  gas  pipes  in  public  streets),  or  if  it  is  impressed  with  a  public 
trust  or  interest  (as  the  business  of  a  common  carrier  who  must  serve  all 
members  of  the  public  on  equal  terms),  the  courts  may  hold  even  a  local 
restraint  unreasonable,  not  as  to  the  promisee  but  as  to  the  public  whom  the 
parties  are  bound  to  serve. 

4.  Agreements  to  combine  for  the  purpose  of  lessening  competition,  limit- 
ing the  output,  regulating  prices,  dividing  the  territory  in  which  business  shall 
be  clone,  and  the  like,  are  illegal  because  detrimental  to  the  public  welfare. 

27.  Effect  of  illegality  upon  contracts  in  which  it  exists. 
In  determining  the  effect  of  illegality  upon  a  contract  in  which 
it  exists,  it  is  necessary  to  determine  whether  the  contract  is 
divisible  or  indivisible,  and  if  divisible,  whether  the  legal  may 
be  separated  from  the  illegal  portion. 

1.  If  a  contract  is  indivisible,  that  is,  if  it  has  one  indivisible 
promise  or  act  on  one  side  and  one  on  the  other,  the  whole 
contract  must  fail  if  one  of  these  be  illegal. 

Example  1.  A  agreed  to  work  for  B  for  a  specified  sum  per  month,  and 
to  take  charge  of  B's  barroom  and  bar.  It  was  illegal  to  maintain  a  bar 
for  the  sale  of  intoxicating  liquors.  A  performed  various  services  includ- 
ing the  sale  of  liquors  at  the  bar.  A  cannot  recover  the  agreed  price  for 
his  services  because  A's  promise  to  perform  the  services  is  an  indivisible  one 
and  is  tainted  with  illegality.  lie  cannot  recover  for  the  legal  services,  that 
is,  those  not  connected  with  the  sale  of  liquors,  because  the  promise  of  B  is 
not  apportioned  but  entire,  and  the  promises  and  acts  of  A  are  also  entire. 
The  whole  contract  must  therefore  be  regarded  as  illegal  and  unenforceable. 


§27]  REALITY  OF  CONSENT  35 

2.  If  the  contract  is  divisible,  that  is,  if  there  be  two  or 
more  promises  on  one  side  and  a  separate  consideration  for 
each  on  the  other  side,  and  if  the  legal  may  be  separated  from 
the  illegal,  the  legal  portion  may  be  enforced  unless  the  illegal 
part  is  so  immoral  or  criminal  that  the  courts  think  it  best  to 
give  the  parties  no  relief. 

Example  2.  A  sells  his  retail  business  to  B  for  $10,000,  and  in  consid- 
eration of  $1000  more  A  agrees  not  to  engage  in  a  similar  business  again 
anywhere  in  the  state,  The  second  agreement  is  illegal  as  an  unnecessary 
restraint  of  trade,  but  it  rests  upon  a  separate  consideration  and  can  there- 
fore be  separated  from  the  legal  part,  and  the  latter  may  be  enforced. 

3.  Ordinarily  the  law  gives  no  relief  to  either  party  to  an 
illegal  contract  either  by  enforcing  the  contract  or  by  allowing 
a  party  to  it  to  recover  anything  paid  or  advanced  under  it. 
But  it  may  aid  a  party  to  get  back  what  he  has  paid,  provided 
he  is,  as  compared  with  the  other  party,  innocent  of  an  illegal 
intent,  or  provided  his  recovery  of  the  money  would  prevent  the 
illegal  transaction  from  being  carried  out.  Statutes  often  pro- 
vide that  money  paid  on  a  gambling  contract  may  be  recovered. 

Examples :  3.  A  marriage  broker  induces  an  ignorant  immigrant  to  pay 
him  money  to  secure  her  a  husband.  The  court  thinks  the  parties  are  not 
in  equal  guilt,  since  the  woman  is  ignorant  and  is  played  upon  by  the  supe- 
rior ability  of  the  broker,  and  permits  her  to  recover  the  money. 

4.  A  pays  B  a  sum  of  money  to  commit  an  assault  on  C.  To  allow  A 
to  recover  this  before  the  assault  is  committed  would  remove  the  induce- 
ment for  B  to  commit  the  assault.  Such  recovery  is  not  out  of  considera- 
tion for  A  but  out  of  consideration  for  C  and  the  public  peace. 


VI.  Reality  of  Consent 

Agreement  consists  in  the  meeting  of  the  minds  of  the  par- 
ties. But  if  one  mind  or  both  give  consent  by  mistake,  or  if 
one  is  misled  by  misrepresentation  or  fraud,  or  if  one  is  com- 
pelled by  duress  or  undue  influence,  there  may  be  no  true 
agreement.  In  such  cases  the  contract  may  be  avoided  by  the 
party  misled.  We  have  then  to  consider  the  effect  of  mistake, 
fraud,  duress,  and  undue  influence. 


36  FORMATION  OF  CONTRACTS  [Ch.  II 

28.  Mistake.  Mistake  about  some  material  fact  connected 
with  the  contract  may  be  mutual,  that  is,  common  to  both  par- 
ties, or  unilateral,  that  is,  made  by  one  party  alone,  (i)  The 
fact  about  which  a  mutual  mistake  occurs  may  be  as  to  the 
subject-matter  of  the  contract,  namely,  (a)  its  existence,  (b)  its 
identity,  or  (c)  its  quality.  (2)  Unilateral  mistake  may  be  (a)  un- 
known to  the  other  party,  (b)  known  to  the  other  party,  (c)  as 
to  the  identity  of  a  party,  or  (d)  as  to  the  nature  of  the  trans- 
action itself. 

(1)  (a)  Mutual  mistake  as  to  the  existence  of  the  subject- 
matter  of  the  contract  really  prevents  a  contract  from  being 
formed  at  all. 

Examples:  1.  A  sells  B  a  horse.  Unknown  to  either  party  the  horse 
died  before  the  contract  was  made.  There  is  no  contract  because  there  is 
no  subject-matter  upon  which  the  minds  of  the  parties  could  meet. 

2.  A  cargo  is  at  sea.  The  owner  sells  it  subject  to  the  risk  of  its  being 
already  lost.  The  buyer  is  bound  although  the  cargo  was  lost  when  the 
contract  was  made,  because  the  buyer  assumes  the  risk.  There  is  no  mis- 
take, because  that  risk  is  a  part  of  the  subject-matter  of  the  contract.  If 
the  owner  knew  it  was  lost,  the  contract  can  be  avoided  for  fraudulent 
concealment. 

(b)  Mutual  mistake  as  to  the  identity  of  the  subject-matter 
enables  either  party  to  avoid  the  contract. 

Example  3.  A  says,  "  I  have  purchased  X's  horse  Billy  and  will  sell 
him  to  you  for  $250."  B  replies,  "  I  will  take  him  at  that  price."  X  had 
two  horses  named  Billy.  A  knew  only  the  one  he  bought  and  B  knew  only 
of  the  other.  There  is  no  binding  contract.  The  minds  have  not  met  upon 
the  same  subject-matter. 

(c)  Mutual  mistake  as  to  the  quality  of  an  article  will  not 
ordinarily  affect  the  validity  of  a  contract. 

Example  4.  A  finds  a  stone  which  appears  to  be  a  jewel  of  some  kind 
and  thinks  it  is  a  topaz.  B,  equally  uncertain  as  to  its  quality  or  value,  buys 
it  for  a  small  sum.  It  turns  out  to  be  an  uncut  diamond  of  great  value. 
The  contract  is  binding.  Neither  party  knew  the  true  nature  of  the  stone 
and  each  had  an  equal  opportunity  to  ascertain. 

(2)  (a)  Unilateral  mistake  unknown  to  the  other  party  is  not 
ordinarily  a  ground  for  avoiding  a  contract. 


§28]  REALITY  OF  CONSENT  7,7 

Example  5.  A  sells  the  stone  (as  above)  believing  it  to  be  a  topaz. 
B  knows  it  is  a  diamond  but  is  ignorant  of  A's  belief.  The  contract  is 
binding.  A  alone  is  mistaken  and  B  has  neither  induced  A's  mistake  nor 
taken  fraudulent  advantage  of  it. 

(b)  Unilateral  mistake  known  to  the  other  party  and  taken 
advantage  of  by  him  may  enable  the  mistaken  party  to  avoid 
the  contract.  But  this  doctrine  has  rather  narrow  limits.  If 
the  opportunity  of  knowledge  is  equally  open  to  both  parties, 
one  is  not  bound  to  reveal  to  the  other  what  he  has  by  superior 
diligence  discovered. 

Examples :  6.  A  buys  of  B  the  negotiable  paper  of  X.  A  believes  X  to 
be  solvent.  B  has  just  learned  of  X's  insolvency  and  knows  that  A  has  not 
yet  learned  of  it  or  had  a  reasonable  opportunity  to  learn  of  it.  A  may 
avoid  the  contract.    B's  fraudulent  concealment  is  fatal. 

7.  A  sells  his  land  to  B.  There  is  a  valuable  mine  in  it.  A  does  not  know 
this.  B  does  know  it  and  knows  that  A  is  ignorant  of  it.  The  contract  is 
binding.  B  is  not  bound  to  disclose  what  A  has  had  an  equal  opportunity 
to  discover,  but  B  must  not  by  any  word  or  artifice  mislead  A. 

8.  A  sells  cotton  to  B,  the  price  being  dependent  upon  whether  the  war 
between  the  United  States  and  Great  Britain  is  ended.  A  asks  B  whether  there 
is  any  news  of  peace.  B,  knowing  that  peace  has  been  declared,  says  there  is 
no  news.    He  thereby  confirms  A's  mistake  and  A  may  avoid  the  contract. 

(c)  Unilateral  mistake  as  to  the  identity  of  the  other  party 
will  avoid  a  contract. 

Example  9.  A  has  been  accustomed  to  deal  with  B.  Unknown  to  A, 
B  has  sold  his  business  to  C.  A  sends  an  order  for  goods  to  B.  C  gets  the 
order  and  ships  the  goods.  A  is  not  bound.  He  has  a  right  to  select  whom 
he  will  deal  with,  and  is  not  obliged  to  have  another  person  than  B  introduced 
into  the  contract. 

(d)  Unilateral  mistake  as  to  the  nature  of  the  contract  may 
avoid  it. 

Examples:  10.  A  is  induced  by  a  trick  of  B  to  sign  a  negotiable  note 
thinking  he  is  signing  a  contract  to  sell  goods  for  B.    A  is  not  bound. 

11.  As  above.  B  indorses  the  note  to  C,  who  pays  value  for  it  in  igno- 
rance of  B's  fraud.  A  is  not  liable  to  C  unless  C  shows  that  A's  negligence 
in  signing  the  note  is  so  great  as  to  make  it  just  that  he  should  suffer  rather 
than  C.  When  the  rights  of  an  innocent  third  party  are  in  question,  A  may 
be  estopped  to  set  up  the  mistake  and  the  fraud.  Whether  A's  negligence 
is  so  great  as  to  work  such  an  estoppel  is  a  question  of  fact. 


38  FORMATION  OF  CONTRACTS  [Ch.  II 

29.  Fraud  and  misrepresentation.  Fraud  consists  in  a  false 
representation  of  fact,  made  with  knowledge  of  its  falsity  (or 
with  reckless  disregard  of  its  truth  or  falsity),  with  the  inten- 
tion that  it  should  be  acted  upon  by  another,  and  actually 
inducing  that  other  to  act  upon  it  to  his  damage.  Fraud  by 
one  party  enables  the  other  party  to  a  contract  to  rescind  it. 
Fraud  is  also  a  tort,  and  is  called  deceit  in  the  law  of  torts. 

Example  i.  A  seller  of  a  horse  represents  him  to  be  sound  and  healthy 
when,  known  to  the  seller  and  unknown  to  the  buyer,  he  has  the  glanders. 
The  buyer  acts  upon  the  representation,  buys  the  horse,  and  afterwards 
discovers  that  it  is  diseased.  The  buyer  may  either  (a)  rescind  the  contract, 
that  is,  return  the  horse  and  recover  the  purchase  money,  or  (b)  keep  the 
horse  and  recover  damages  in  an  action  in  tort  for  deceit. 

If  in  the  above  case  the  seller  actually  believes  the  horse  to 
be  sound  when  he  makes  the  statement,  there  is  no  fraud  but 
merely  innocent  misrepresentation.  In  such  case  there  can 
be  no  action  for  deceit,  since  in  order  to  base  an  action  for 
deceit  it  is  necessary  either  to  show  that  the  seller  knew  that 
what  he  said  was  false,  or  to  show  that  he  knew  that  he  did 
not  know  whether  it  was  true  or  false,  that  is,  made  the  state- 
ment without  any  belief  and  in  reckless  disregard  of  its  truth 
or  falsity.  At  common  law  a  contract  would  not  be  set  aside 
for  innocent  misrepresentation,  and  this  is  probably  the  gener- 
ally accepted  rule,  although  the  equity  courts  often  set  contracts 
aside  upon  this  ground. 

Misrepresentations  of  fact  may  take  the  form  of  warranties, 
in  which  case  they  become  collateral  contract  promises,  and 
an  action  lies  for  the  breach  of  them  (see  sec.  53  post). 
Representations  may  become  a  part  of  the  main  contract,  and 
then  if  they  are  false  the  contract  is  broken,  and  an  action  lies 
for  its  breach.  Whether  a  representation  merely  induces  one 
to  make  a  contract,  or  becomes  a  warranty,  or  becomes  a  term 
of  the  contract  itself,  is  a  matter  of  construction  too  difficult 
to  be  treated  here. 

Example  2.  The  seller  of  a  horse  says,  "  I  warrant  him  to  be  sound 
and  healthy."  Unknown  to  either  party,  the  horse  has  the  glanders.  The 
buyer  has  an  action  in  contract  against  the  seller  for  a  breach  of  warranty. 


§§3o,3i]  REALITY  OF  CONTRACT  39 

If  the  seller  knew  the  horse  had  the  glanders,  the  buyer  could,  at  his  elec- 
tion, sue  for  breach  of  warranty,  or  sue  in  tort  for  deceit,  or  rescind  the  con- 
tract and  recover  the  purchase  money. 

If  the  misrepresentation  is  as  to  a  matter  of  opinion  rather 
than  of  fact,  there  is  no  actionable  fraud,  because  the  injured 
party  has  no  right  to  rely  upon  it. 

Example  3.  The  seller  of  a  horse  says,  "This  horse  is  the  fastest 
animal  in  the  county."  No  sensible  buyer  would  attach  any  importance  to 
such  a  "  puff  "  by  a  seller. 

In  some  cases  where  the  defect  is  not  discoverable  upon 
examination,  and  is  a  fatal  one,  the  seller  may  be  under  a  duty 
to  disclose  it  to  the  buyer.  The  general  rule,  however,  is  caveat 
emptor,  —  let  the  buyer  beware.  But  in  no  case  must  the  seller 
resort  to  "artful  concealment  "  to  cover  up  a  defect. 

Example  4.  B  sells  C  a  mahogany  log  too  large  to  be  easily  rolled  over, 
and  conceals  a  defect  by  rolling  the  defective  part  next  the  ground.  This 
is  artful  concealment  for  which  the  buyer  may  rescind. 

30.  Duress.  Duress  consists  in  actual  or  threatened  violence 
or  imprisonment  whereby  the  will  of  a  contracting  party  is 
coerced.  Such  threatened  violence  or  imprisonment  may  be 
directed  against  one's  self  or  against  a  member  of  one's  family. 
Whatever  threat  overcomes  the  will  of  the  contracting  party 
and  compels  him  to  do  what  he  otherwise  would  not  do,  may 
in  general  be  regarded  as  duress. 

Exatnple.  A's  son  has  been  in  B's  employment  and  is  charged  with 
embezzlement.  B  threatens  to  have  the  son  arrested  and  prosecuted  unless 
A  pays  or  secures  to  B  the  sum  alleged  to  have  been  taken.  A  gives  B  his 
note  for  the  amount.  This  note  may  be  avoided  upon  the  ground  that  it 
was  given  under  duress,  that  is,  under  the  fear  occasioned  by  B's  threat  to 
imprison  A's  son. 

31.  Undue  influence.  Undue  influence  consists  in  an  uncon- 
scientious use  of  power  over  the  will  of  another  whereby  that 
other  is  induced  to  make  contracts  or  gifts  which  he  otherwise 
would  not  make.  It  is  a  subtle  form  of  duress  whereby  a  per- 
son of  superior  intellect  and  will  dominates  one  of  inferior 
capacity  or  experience. 


40  FORMATION  OF  CONTRACTS  [Ch.  II] 

Example.  A  stepfather  manages  the  property  of  his  infant  stepchildren. 
As  each  one  arrives  of  age  the  stepfather  buys  the  property  or  interest, 
takes  a  conveyance,  and  pays  an  inadequate  consideration.  The  conveyances 
so  obtained  may  be  set  aside,  since  the  influence  of  the  parent  or  guardian 
is  presumed  to  continue  for  some  time  after  the  child  or  ward  reaches  his 
majority,  and  the  contract  is  made  under  such  undue  influence  as  is  unfair. 

In  some  cases,  as  parent  and  child,  or  attorney  and  client, 
the  law  presumes  that  the  parent  or  attorney  exercised  undue 
influence.  In  other  cases  the  burden  is  upon  one  who  seeks 
to  set  aside  a  transaction  to  show  that  undue  influence  was  in 
fact  exerted. 


HOW    TO    MAKE    A    CONTRACT 

The  object  in  drawing  up  a  contract  should  be  to  embody  the  exact 
agreement  of  the  parties  in  such  a  manner  that  no  future  misunderstandings 
as  to  its  terms  shall  arise.  There  is  a  rule  of  law  that  when  a  contract  is 
reduced  to  writing  the  terms  of  the  written  instrument  cannot  be  contra- 
dicted or  varied  by  parol  evidence.  While  there  are  some  exceptions  to 
this  rule,  not  necessary  to  be  mentioned  here,  the  rule  is  very  general  in  its 
application  and  should  be  borne  in  mind  when  the  contract  is  written  and 
executed.  A  very  good  way  is  for  each  party  to  put  in  one-two-three 
order  the  promises  he  is  ready  to  make,  and  for  the  other  party  to  see 
whether  these  are  the  promises  he  is  willing  to  accept.  When  these  bilat- 
eral promises  are  embodied  in  the  written  instrument  the  whole  should 
be  carefully  considered  again  in  order  to  make  sure  that  each  party  has 
given  and  exacted  just  what  he  intends.  It  is  very  unwise  to  leave  any- 
thing to  an  outside  parol  agreement. 

A  general  form  of  a  contract  is  here  given.  The  particulars  may  be 
varied  according  to  the  actual  agreement. 

"  This  Agreement,  made  in  duplicate  this  fifth  day  of  April,  one  thou- 
sand nine  hundred  and  five,  by  and  between  Alfred  Black,  of  the  city  of 
Ithaca,  in  the  state  of  New  York,  of  the  first  part,  and  William  Coles,  of 
the  same  city  and  state,  of  the  second  part, 

"  Witnessetii,  that  the  said  party  of  the  first  part,  for  and  in  considera- 
tion of  the  agreement  hereinafter  contained,  to  be  performed  by  the  party 
of  the  second  part,  agrees  to  and  with  said  party  to  construct  and  finish  in 
a  good,  substantial,  and  workmanlike  manner  on  the  lot  belonging  to  the 
party  of  the  second  part,  and  known  as  No.  15  in  Prospect  Street  in  the 
city  of  Ithaca,  N.Y.,  one  frame  building  in  accordance  with  the  plan  and 
specifications  hereto  annexed,  of  good,  substantial  materials,  on  or  before 


PRACTICAL  SUGGESTIONS  4 1 

the  fifteenth  day  of  November  next.  And  the  party  of  the  second  part,  in 
consideration  thereof,  agrees  to  pay  to  the  said  party  of  the  first  part  for  the 
same  the  sum  of  five  thousand  dollars,  lawful  money  of  the  United  States, 
as  follows  :  the  sum  of  one  thousand  dollars  when  the  foundations  are 
completed  ;  the  sum  of  one  thousand  dollars  when  the  frame  or  super- 
structure is  inclosed  ;  the  sum  of  one  thousand  dollars  when  the  structure 
is  plastered  ;  and  the  balance  of  two  thousand  dollars  when  the  building  is 
fully  completed  according  to  the  plans  and  specifications. 

"  And  the  party  of  the  first  part  further  agrees  that  in  case  of  his  failure 
to  complete  the  work  by  the  date  fixed  he  will  pay  to  the  party  of  the  sec- 
ond part  as  liquidated  damages,  and  not  as  a  penalty,  ten  dollars  for  each 
and  every  day  the  full  completion  of  his  contract  is  delayed  beyond  that 
date. 

"  In  Witness  Whereof,  the  parties  to  these  presents  have  hereunto 

set  their  hands  the  day  and  year  first  above  mentioned. 

Alfred  .dlack. 

William  Coles." 

If  the  signatures  are  to  be  witnessed,  add  at  the  left,  "  Signed  in  the 
presence  of,"  and  have  the  witness  write  his  name  beneath  this  phrase. 
If  there  is  a  witness,  he  must  be  produced  in  court  in  order  to  prove  the  sig- 
natures, or  his  absence  must  be  satisfactorily  accounted  for.  If  there  be  no 
witness,  then  other  evidence,  as  the  testimony  of  the  other  party,  the  proof  of 
handwriting,  etc.,  may  be  resorted  to  in  order  to  prove  the  signature  in 
question.  Little  will  now  be  gained  in  most  states  by  adding  a  seal.  If  a 
seal  is  used,  the  final  clause  should  read,  "  In  witness  whereof,  the  parties 
to  these  presents  have  hereunto  set  their  hands  and  seals  the  day  and  year 
first  above  written"  (see  sec.  23  ante  as  to  the  effect  of  a  seal). 

If  the  signature  of  a  party  is  to  be  affixed  by  his  agent,  the  form  should 
be  "  John  Doe,  by  Andrew  Bright,  his  agent."  The  use  of  the  word  "  by  " 
is  very  important.  The  signature  "John  Doe,  Andrew  Bright,  Agent," 
might  make  Bright  a  party  (see  sec.  131  post). 

If  some  one  (A.  B.)  is  to  guaranty  the  performance  by  the  party  of  the 
first  part  above,  and  if  the  guaranty  is  given  at  the  time  the  contract  is  made, 
there  may  be  written  below  the  signatures  the  following : 

"In  consideration  of  the  agreement  above  made  by  the  party  of  the  sec- 
ond part,  I  do  hereby  guaranty  to  the  said  party  that  the  above-named 
Alfred  Black  will  well  and  faithfully  perform  everything  by  the  foregoing 
agreement  on  his  part  to  be  performed,  at  the  times  and  in  the  manner 
above  provided.  A.  B.' 

If  the  guaranty  is  made  subsequent  to  the  contract  to  be  guarantied,  it 
will  require  a  new  consideration,  and  this  should  be  expressed  in  the  written 
guaranty;  for  example,  "In  consideration  of  one  dollar  to  me  paid  by 
William  Coles,  the  receipt  whereof  is  hereby  acknowledged,  I  do  hereby 
guaranty,  etc."  (see  sec.  88  post). 


42 


FORMATION  OF  CONTRACTS  [Ch.  II] 


A  simpler  form  of  contract  would  be  as  follows  : 

"A.  B.  and  C.  D.  do  hereby  mutually  agree  as  follows:  A.  B.  to  {state 
what  A.  B. promises')  ;  C.  D.  to  (state  what  C.  D.  promises').  A  B 

Ithaca,  N.Y.,  Jan.  5,  1905.  C.  D." 

But  the  more  formal  phraseology  is  safer  to  use  in  order  to  make  clear 
that  the  promises  are  mutually  dependent  and  indivisible  (see  sec.  39  post). 

A  contract  may  be  assigned  in  the  following  form  : 

"  For  value  received,  I  hereby  assign  to  E.  F.  the  within  contract. 

Ithaca,  N.Y.,  June  7,  1905.  A.  B." 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  10.  Define  contract.  Distinguish  agreement  from  contract. 
Illustrate.  Distinguish  affirmative  and  negative  contracts.  How  many 
parties  to  a  contract?    What  is  a  novation?    Illustrate. 

Problem  1.  B  in  a  spirit  of  frolic  and  banter  offers  C  $300  for  a  watch 
worth  $15.  C  in  the  same  spirit  accepts,  takes  B's  check  for  $300  on  a 
bank  in  which  he  has  no  deposit,  and  delivers  the  watch  to  B.  C  presents 
the  check,  and  when  it  is  dishonored,  brings  an  action  against  B  for  the 
$300.  B  sets  up  the  above  facts  and  offers  to  return  the  watch.  Should  Q 
recover  the  $300  against  B  ? 

11.  Name  the  essentials  of  an  enforceable  contract. 

12.  What  is  the  meaning  of  agreement.  How  is  it  determined  when  an 
agreement  has  been  reached  ?    Why  must  its  terms  be  definite  ? 

Problem  2.  B  offers  to  sell  his  horse  to  C  for  $165.  C  understands  B 
to  say  #65,  and  replies,  "  I'll  give  fifty-five."  B  understands  that  C  means 
"  one  fifty-five,"  having  dropped  the  "  one,"  as  is  not  unusual  among  traders. 
B  replies,  "  Sixty-five  is  the  price."  C  then  says,  "  I  '11  take  him."  Is  there 
a  contract? 

Problem  J.  B  agrees  to  give  his  niece  C  100  acres  of  land  if  she  will 
live  with  him  until  her  marriage  and  act  as  his  housekeeper.  C  accepts 
and  performs  her  part  of  the  agreement.  B  refuses  to  convey  to  her 
any  land.  C  sues  for  breach  of  the  contract.  Is  there  an  enforceable  con- 
tract?   Has  C  any  remedy? 

Problem  4.  B  hires  C  and  agrees  to  pay  him  "  good  wages,"  but  after- 
wards refuses  to  give  him  any  work.  C  sues  for  damages  for  breach  of  con- 
tract.   Result? 


REVIEW  QUESTIONS  AND  PROBLEMS  43 

13.  Name  three  classes  of  agreements.  Illustrate.  Point  out  the  differ- 
ent classes  in  Example  6,  sec.  10. 

14.  How  do  agreements  originate?  Define  offer.  Define  acceptance. 
What  forms  do  offer  and  acceptance  take?  Explain  bilateral  executory 
contract ;  unilateral  executory  contract  ;  executed  contract.  Define  express 
promise ;  implied  promise. 

1.  Must  the  offer  be  communicated?  To  whom?  When  is  the  offer 
of  a  reward  published  in  a  newspaper  communicated  ?  When  one  pur- 
chases a  railway  ticket  who  makes  the  offer  ? 

Problem  5.  C  is  on  a  train  and  B's  agent  comes  through  to  take  orders 
for  the  delivery  of  baggage.  C  gives  the  agent  a  check  for  his  trunk  and 
receives  a  receipt  containing  a  notice  that  B  will  not  be  liable  in  case  of 
loss  to  an  amount  exceeding  $100.  C  does  not  read  the  receipt  or  know  of 
its  contents.    The  baggage  is  lost.    Is  C  limited  to  a  recovery  of  $100  ? 

2.  How  may  the  acceptance  be  communicated?  Are  words  necessary ? 
Must  it  actually  reach  the  offeror  ?  Is  mental  acceptance  sufficient  ?  When 
an  offer  is  made  by  mail  when  is  the  acceptance  complete  ? 

Problem  6.  B  asked  C  for  an  estimate  of  the  cost  of  fitting  up  an  office. 
C  made  the  estimate  (not  an  offer).  B  then  wrote  C  saying  that  if  C  would 
do  the  work  within  two  weeks  he  might  begin  at  once.  No  answer  was 
received.  The  next  day  B  countermanded  the  order.  Meanwhile  C  pur- 
chased material  and  began  to  work  upon  it  at  his  shop.  C  now  sues  B  for 
breach  of  contract.    Was  there  a  completed  contract? 

Problem  7.  C  has  supplied  B  with  eel  skins  used  in  his  business.  He 
has  sent  them  without  a  specific  order  and  B  has  kept  them  and  paid 
for  them.  C  sends  B  a  quantity  on  April  2.  B  keeps  them  for  some 
months  unpacked.  They  are  then  destroyed  by  fire.  Is  B  liable  to  C  for 
the  price  ? 

3.  What  is  the  effect  of  a  qualified  acceptance  ?    Illustrate. 

Problem  8.  B  offers  C  2000  tons  of  iron  rails  at  so  much  per  ton. 
C  telegraphs,  "  Send  me  1200  tons  iron  rails  as  per  offer."  B  telegraphs  a 
refusal  to  fill  the  order.  C  then  telegraphs,  "  Send  me  2000  tons  iron  rails 
as  per  offer."  B  again  refuses  to  fill  the  order.  C  then  sues  B  for  breach 
of  contract.    Result? 

4.  What  control  has  the  offeror  over  the  offer  before  acceptance  ?  Same 
question,  when  offer  is  made  under  seal  and  when  offeree  pays  to  have 
time  to  accept? 

Problem  g.  C  is  offering  goods  at  auction.  B  bids  $100  for  the  lot,  but 
retracts  the  bid  before  the  hammer  falls.  C  refuses  to  accept  the  recall 
of  the  bid  and  knocks  down  the  goods  to  B,  who  refuses  to  take  them. 
C  sues  B.    Was  there  a  contract? 


44  FORMATION  OF  CONTRACTS  [Ch.  II] 

Problem  10.  B  sent  a  letter  to  C  saying :  "  We  are  able  to  offer  salt  at 
85  cents  a  barrel.  Shall  be  pleased  to  receive  orders."  C  at  once  ordered 
2000  barrels  at  that  price.  B  refused  to  fill  the  order,  as  salt  had  gone  up 
in  price.    C  sues  B  for  breach  of  contract.    Result  ? 

5.  Suppose  the  offeree  accepts  after  the  offeror  has  revoked  but  before 
the  offeree  knows  of  the  revocation  ? 

6.  How  does  an  offer  lapse  ?  What  is  the  effect  upon  an  unaccepted 
offer  of  the  death  of  the  offeror  or  of  the  offeree? 

15.  Who  is  an  infant?  When  is  he  of  age  ?  Which  of  his  contracts  are 
binding  during  infancy  ?  Which  are  binding  after  he  is  of  age  ?  What  are 
necessaries?    What  is  ratification? 

Problem  11.  B  bought  of  C  a  bicycle  for  %^o  on  August  10  at  8  a.m. 
B's  twenty-first  birthday  was  on  August  1 1,  and  it  was  proved  that  he  was 
born  at  10  p.m.  of  that  day.  C  sues  B  for  the  agreed  price.  B  seeks  to 
disaffirm  the  contract  and  pleads  that  it  was  made  during  infancy.    Result? 

Problem  12.  B,  a  student  of  eighteen  years,  engaged  a  room  of  C  for 
forty  weeks,  at  $2  a  week,  payable  weekly.  At  the  end  of  ten  weeks  he 
left  the  room  and  C  was  unable  to  secure  another  lodger.  C  sues  B  for 
$80.    B  pleads  infancy.    How  much  may  C  recover? 

Problem  13.  B  while  an  infant  bought  jewelry  (not  necessary)  of  C. 
After  B  became  of  age  he  acknowledged  the  debt  and  said  he  would  pay  it 
as  soon  as  he  had  the  means.    Is  B  liable  to  C? 

Problem  14.  B,  an  infant,  buys  a  horse  of  C.  After  B  is  twenty-one  he 
sells  the  horse  to  X.    C  sues  B  for  the  price  of  the  horse.    Can  B  succeed  ? 

Problem  IS-  C,  an  infant,  sells  B  a  horse.  Before  C  is  twenty -one  he  brings  an 
action  to  recover  the  horse  from  B.  Will  such  an  action  lie  during  C's  minority? 

16.  What  contracts  of  an  insane  person  are  voidable?  What  are  bind- 
ing?   Same  questions  as  to  idiots?    Intoxicated  persons? 

17.  What  was  the  common  law  rule  as  to  married  women's  contracts? 
What  is  a  void  contract?  (Are  an  infant's  contracts  void?)  How  do 
statutes  change  the  common  law  as  to  married  women's  contracts? 

18.  What  contracts  require  a  consideration?  What  instruments  have 
presumptive  consideration?    What  is  the  effect  of  a  seal  at  common  law? 

Problem  16.  C  voluntarily  supplied  necessary  articles  to  B's  father,  who 
was  old  and  poor.  B  afterwards  promised  C  to  pay  for  them.  C  now  sues  B 
on  that  promise.    Is  B  liable  ? 

19.  Must  the  consideration  equal  the  promise  in  value  ?  What  is  a  valu- 
able consideration?    What  is  not? 

Problem  17.  B  says  to  C,  "  If  you  will  take  a  trip  abroad,  I  will  pay 
your  expenses."  C  takes  the  trip,  and  now  sues  B  for  the  expense  incurred. 
Is  B  liable  ? 


REVIEW  QUESTIONS  AND  PROBLEMS  45 

Problem  iS.  B  writes  to  C,  "  If  you  will  extend  the  time  which  A  has 
to  pay  you  his  debt,  I  will  become  surety  for  A's  payment."  C  extends  the 
time  and  takes  from  A  a  new  note  on  three  months'  time.  A  does  not  pay. 
C  sues  B.    Should  C  succeed  ? 

Problem  ig.  B  and  C  were  in  dispute  about  a  claim  made  by  C  upon  B 
for  an  injury  to  goods  which  B  was  carrying  for  C.  B  finally  agreed  to 
give  and  C  to  take  one  half  the  amount  C  first  claimed.  C  sues  on  B's 
promise.  B  answers  that  there  was  no  consideration  for  his  promise  because 
he  (B)  was  not  liable  at  all  to  C  for  the  injury  to  the  goods. 

Problem  20.  C  was  a  constable  in  A.  B  offered  a  reward  of  $100  for 
the  arrest  of  X  for  a  specified  crime.  C,  knowing  of  the  reward,  arrested  X 
in  A,  and  now  brings  an  action  for  the  reward.    What  objection  ? 

20.  What  is  meant  by  a  past  consideration  ?  Distinguish  from  an  exe- 
cuted consideration.  Illustrate.  Effect  of  previous  request?  What  is 
meant  by  waiving  a  legal  bar  to  an  action  on  a  contract? 

Problem  21.  B  says  to  C,  "If  you  will  look  up  certain  of  my  debtors,  I 
will  pay  you  what  is  right."  C  does  so.  B  then  promises  to  pay  C  £100. 
How  much  may  C  recover? 

21.  What  is  meant  by  an  illegal  consideration  ?    Illustrate. 

22.  What  is  the  Statute  of  Frauds?  Object?  When  first  enacted? 
What  sections  deal  with  contracts?  State  the  provisions  of  the  fourth  sec- 
tion. Of  what  may  the  memorandum  consist?  What  must  it  contain? 
State  the  provisions  of  the  seventeenth  section.  In  what  three  ways  may 
this  section  be  satisfied?  Is  the  seventeenth  section  in  force  in  your  state? 
If  so,  what  contracts  for  personalty  are  within  the  statute  ? 

Problem  22.  A  memorandum  of  sale  made  by  an  auctioneer  read  as 
follows  : 

Oct.  9,  1 866.    This  day  sold  B's  house  and  land  on  Bartlett  Street 
in  Lewiston  ;  was  struck  down  to  C  for  $1200,  one  third  down. 

D.  E.,  Auctioneer. 
C  sues  B,  alleging  he  (C)  was  to  pay  one  third  down,  one  third  in  one  year, 
and  one  third  in  two  years,  and  that  B  refused  to  carry  out  the  contract. 
B  pleads  the  Statute  of  Frauds.  Is  this  a  good  defense? 

Problem  2J.  B  sells  C  by  parol  two  standing  trees  for  $10.  Afterwards 
B  refuses  to  allow  C  to  cut  the  trees.  C  sues  B  for  breach  of  contract. 
B  pleads  the  Statute  of  Frauds.    Result? 

Problem  24.  B.  Ry.  and  C  agree  orally  that  if  C  will  grade  and  lay  a  side 
track  or  switch,  the  Ry.  will  maintain  the  switch  for  C's  benefit  for  shipping 
purposes  as  long  as  C  may  need  it.  C  does  his  part.  The  B.  Ry.  refuses  to 
perform  its  part.  C  brings  an  action  for  damages.  The  Ry.  pleads  the 
Statute  of  Frauds.    Which  provision  ?    Result  ? 


46  FORMATION  OF  CONTRACTS  [Ch.  II] 

23.  What  is  a  seal  ?  What  is  a  sealed  contract  ?  What  is  the  effect  of  a 
seal?    What  statutory  changes  in  the  effect  of  a  seal? 

24.  What  contracts  are  usually  declared  by  statute  to  be  illegal  ?  What 
is  the  effect  of  prohibiting  an  act  ?  What  is  the  effect  of  affixing  a  penalty 
to  the  doing  of  an  act  ? 

Problem  2J.  A  statute  prohibits  any  work,  labor,  or  business  on  Sunday. 
C  agrees  with  B  to  procure  advertisements  to  be  published  in  B's  Sunday 
newspaper.    Is  this  contract  illegal? 

Problem  26.  Under  a  similar  statute  B  makes  and  delivers  a  promissory 
note  to  C  on  Sunday.    May  C  enforce  the  note  ? 

25.  Define  wagering  contracts.  Were  they  illegal  at  common  law? 
Explain  wagers  on  the  rise  and  fall  of  the  market.  In  what  sense  are 
insurance  contracts  wagering  contracts? 

Problem  27.  C,  a  broker,  sues  B,  a  customer,  for  moneys  paid  and 
expended  by  C  in  certain  stock  transactions.  It  was  understood  between  C 
and  B  that  the  purchases  and  sales  made  by  C  for  B  should  not  result  in 
an  actual  transfer  of  stocks,  but  that  in  each  case  the  contract  should  be 
adjusted  by  the  payment  of  money  by  B  in  case  the  transaction  proved  to 
be  a  losing  one,  or  to  B  in  case  it  was  a  winning  one.  C  paid  out  for  B 
more  than  he  took  in  for  him.    Can  C  recover  this  amount? 

26.  Enumerate  and  illustrate  contracts  illegal  at  common  law.  What  is 
a  contract  in  restraint  of  trade  ?  Are  all  such  contracts  illegal  ?  What  is 
the  test  ? 

Problem  28.  B  had  a  claim  against  the  United  States.  C  agreed  with  B 
to  secure  an  act  of  Congress  appropriating  money  for  the  payment  of  the 
claim,  and  B  agreed  to  pay  C  25%  of  whatever  sum  Congress  might  appro- 
priate. C  secured  an  appropriation  in  favor  of  B  for  $12,000.  B  refuses  to 
pay  C,  who  then  brings  an  action  against  him  for  $3000.    Result? 

Problem  2Q.  C  charges  B  with  embezzlement.  Upon  C's  agreeing  not 
to  prosecute  B  criminally,  the  latter  gives  C  a  promissory  note  for  the 
amount.    Is  B  liable  upon  the  note  ? 

27.  What  is  an  indivisible  contract?  What  is  the  effect  if  any  portion 
of  it  is  illegal?  What  is  a  divisible  contract?  What  is  the  effect  if  one 
part  is  illegal?  If  a  party  pays  money  upon  an  illegal  contract,  can  he 
recover  it? 

Problem  jo.  C  deposited  $500  with  B  as  a  wager  on  a  foot  race,  know- 
ing it  was  to  be  a  "bogus  race,"  and  intending  to  overreach  some  one. 
Before  the  race  was  run  C  became  suspicious  that  he  would  be  overreached, 
and  demanded  back  his  money.  B  refused  to  give  it  back,  and  finally  paid 
it  to  A,  the  pretended  winner  of  the  race.  C  sues  B  for  the  amount. 
Result? 


REVIEW  QUESTIONS  AND  PROBLEMS  47 

28.  What  is  meant  by  reality  of  consent?  What  will  prevent  reality  of 
consent?  Distinguish  between  mutual  and  unilateral  mistake.  Name  the 
classes  of  mutual  mistake.  Explain  and  illustrate  each.  Which  will  avoid  a 
contract?    When  will  unilateral  mistakes  avoid  a  contract? 

Problem  31.  Contract  of  sale  of  a  lot  of  land  on  Prospect  Street  in 
Waltham.  In  an  action  against  the  buyer  for  the  price  he  sets  up  that  the 
land  now  tendered  him  is  on  another  Prospect  Street  than  the  one  he  had  in 
mind,  and  understood  that  the  seller  had  in  mind,  when  the  contract  was 
made.    Is  this  a  good  defense? 

Problem  32.  C.  Ry.  prepares  a  rate  sheet  and  by  mistake  prints  the  fare 
from  A  to  D  as  $21.25  when  it  should  be  $36.70.  B  discovers  the  mistake 
and  takes  advantage  of  it  by  at  once  purchasing  of  a  local  agent  a  large 
number  of  tickets  at  the  printed  price.  C.  Ry.  seeks  to  enjoin  B  from  dis- 
posing of  these  tickets  and  to  compel  him  to  return  them  and  receive  back 
his  money.    Result? 

29.  Define  fraud  and  its  effect  upon  the  contract.  Distinguish  innocent 
misrepresentation.  Is  this  a  tort?  Will  it  avoid  a  contract?  When  does  a 
representation  become  a  warranty  ?  What  is  the  effect  of  a  representation 
of  opinion?    What  is  fraudulent  concealment? 

Problem  33.  B  had  engaged  S  to  teach  school  in  District  A  in  case  she 
secured  a  certificate  by  a  certain  time.  C  applied  for  the  same  school,  and 
on  being  informed  of  the  contract  with  S,  stated  to  B  that  there  would  be 
no  examination  for  teachers  in  time  for  the  opening  of  school.  B  then 
engaged  C.  Later  S  appeared  with  the  necessary  certificate  and  B  refused 
to  allow  C  to  teach.  C  sues  B  for  breach  of  contract,  (a)  In  case  C  knew 
there  would  be  an  examination  can  he  recover?  (b)  In  case  C  believed 
there  would  not  be  an  examination  can  he  recover? 

Problem  34.  C  sold  B  cattle  knowing  they  had  Texas  fever,  a  disease 
not  discoverable  by  examination,  and  concealing  the  fact.  The  cattle  died, 
and  C  sues  for  the  price.    Should  he  win  the  suit? 

30.  Define  duress.    Need  it  be  against  the  contracting  party? 

31.  What  is  undue  influence?  Distinguish  from  duress.  When  is  it 
presumed  ? 

Draw  a  contract  by  which  you  agree  to  work  for  John  Doe  as  clerk  in 
his  store  for  one  year  with  a  vacation  of  two  weeks,  for  $10  a  week  payable 
weekly,  and  are  to  have  at  cost  price  such  goods,  not  exceeding  $100  in 
the  aggregate,  as  you  may  choose  to  select  from  his  stock. 

Draw  a  contract  by  which  Richard  Roe  guaranties  the  faithful  perform- 
ance of  your  part  of  the  above  contract. 

Draw  an  assignment  of  your  right  to  the  goods. 


CHAPTER  III 
OPERATION  AND  DISCHARGE  OF  CONTRACTS 

I.   Liabilities  and  Rights  of  Third  Parties 

32.  Liability  of  third  parties.  The  problem  here  is  twofold  : 
first,  whether  any  one  can  be  made  liable  upon  a  contract  who 
is  not  a  party  to  it  ;  and  second,  whether  one  may  be  liable  for 
interfering  with  the  formation  or  performance  of  contracts. 

(<?)  Contracts  bind  only  the  parties  to  them.  A  person  can- 
not be  made  liable  upon  a  contract  to  which  he  was  not  a  party, 
for  agreement  lies  at  the  basis  of  all  true  contracts.  But  an 
undisclosed  principal  may  be  liable  on  a  contract  made  by  his 
agent,  although  by  its  terms  it  is  a  contract  between  the  agent 
and  the  other  party  ;  this  is  an  exception  to  the  general  rule, 
and  is  treated  later  (see  sec.  129). 

Examples :  1.  A  contracts  with  B.  In  fact  A  is  acting  for  an  undisclosed 
principal  P.    When  B  learns  this  he  may  hold  P  liable  on  the  contract. 

2.  But  if  A,  as  above,  exceeds  the  authority  P  gave  him,  B  cannot  hold  P. 
It  is  really  P's  consent  that  A  may  make  the  contract  that  renders  P  liable. 

(b)  Third  persons  may  render  themselves  liable  in  tort  by 
interfering  with  contracts,  by  inducing  one  party  to  a  contract 
to  commit  a  breach  of  it,  or  by  using  unlawful  means  to  prevent 
a  person  from  making  a  contract.  A  boycott  is  brought  about 
by  inducing  persons  not  to  deal  with  the  one  boycotted.  If 
force  or  fraud  is  used,  the  boycott  becomes  unlawful. 

Examples :  3.  A  engages  B  to  sing  at  his  theater  for  the  season.  X  in- 
duces B  to  break  this  contract  and  sing  at  X's  theater.  X  is  liable  to  A  for 
the  damages  caused  by  B's  breach  of  contract. 

4.  A  is  negotiating  with  15  to  sing  at  his  theater.  X  falsely  tells  B  that 
A  is  insolvent  and  cannot  pay  the  salary.  B  refuses  to  contract.  X  is  liable 
in  tort  to  A  for  inducing  B,  by  false  representations,  not  to  enter  into  a 
contract  with  A. 

48 


[§§33.34]  ASSIGNMENT  49 

5.  Strikers  threaten  to  assault  workmen  who  are  seeking  their  places,  and 
thus  prevent  the  employer  from  getting  new  workmen.  The  strikers  are 
liable  to  the  employer  for  preventing  him  by  unlawful  means  (threats  of 
violence)  from  making  contracts  with  those  who  otherwise  would  apply. 
The  strikers  may  also  be  enjoined  from  using  unlawful  means  for  this  pur- 
pose. If  the  strikers  also  keep  customers  away  by  such  means,  there  is  an 
unlawful  boycott  of  the  employer's  business. 

33.  Rights  of  third  parties.  In  most  of  the  United  States, 
but  not  in  England  or  Massachusetts,  if  a  contract  is  made  by 
A  with  B  for  the  direct  benefit  of  C,  the  latter  may  recover 
upon  it,  although  A  furnished  the  consideration  and  the  promise 
of  B  was  made  to  A.  This  is  especially  so  whenever  A  owes  C 
some  duty  which  he  is  seeking  to  discharge  by  giving  C  the 
benefit  of  B's  promise.  So  also  an  undisclosed  principal  may 
sue  upon  a  contract  made  by  his  agent  in  his  behalf. 

Examples :  1.  A  lends  B  money  and  B  promises  A  to  repay  it  to  C  to 
whom  A  owes  money.  C  may  maintain  an  action  against  B  upon  the 
promise  made  for  his  benefit. 

2.  An  incoming  partner  promises  an  outgoing  partner  to  assume  and 
pay  the  latter's  obligations  to  the  partnership  creditors.  The  creditors  may 
sue  the  incoming  partner  upon  the  promise  made  for  their  benefit. 

3.  A  father  agrees  to  name  his  child  after  B,  in  consideration  of  B's 
promise  to  pay  the  child  $1000  when  he  is  twenty-one.  The  father  names 
the  child  after  B.  When  the  child  is  twenty-one  he  may  compel  B  to  pay 
him  the  money  so  promised. 

4.  A  contracts  with  B,  but  is  secretly  acting  for  P,  an  undisclosed  prin- 
cipal.   P  may  hold  B  upon  the  contract. 


II.  Assignment  of  Contracts 

34.  Assignment  by  act  of  the  parties.  A  bilateral  contract 
creates  both  liabilities  and  rights.  The  problem  is  whether 
either  the  liabilities  or  the  rights  may  be  assigned  by  a  party 
to  the  contract  to  some  other  person. 

1.  Assignment  of  liabilities.  A  party  to  a  contract  cannot  assign 
or  transfer  his  liabilities  under  it.  The  other  party  has  a  right 
to  look  to  the  person  with  whom  he  has  contracted.  One  could 
assign  his  rights  and  delegate  the  performance  of  his  duties, 
but  would  remain  liable  if  they  were  not  properly  performed. 


5o  OPERATION  OF  CONTRACTS  [Ch.  Ill 

Example  i.  A  let  a  carriage  to  B  at  a  yearly  rental  for  five  years,  and 
agreed  to  keep  it  in  repair  and  to  paint  it  every  year.  A  sold  his  business 
to  C  and  notified  B  that  C  would  be  answerable  for  future  repairs. 
B  refused  to  accept  C  and  returned  the  carriage.  B  is  right.  He  is  not  bound 
to  look  to  anybody  except  A  for  the  repairs.  But  nevertheless  A  could 
delegate  to  C  the  doing  of  the  necessary  work,  remaining  himself  personally 
liable  for  any  negligence  or  nonperformance.  If  the  work  is  artistic  work, 
the  performance  of  it  cannot  be  delegated  ;  the  other  party  has  a  right  to 
the  artistic  skill  of  the  person  with  whom  he  contracted. 

2.  Assignment  of  rights.  The  rights  one  acquires  under  a 
contract  may  be  assigned  if  they  relate  to  money  or  property, 
but  one  cannot  assign  a  right  to  some  personal  service.  At 
common  law  the  assignee  must  sue  in  the  name  of  the  assignor, 
but  statutes  now  generally  give  the  assignee  the  right  to  sue  in 
his  own  name.  The  assignee  is  subject  to  whatever  defenses 
might  have  been  set  up  against  his  assignor;  he  gets  the 
assignor's  rights,  and  no  more. 

Examples :  2.  A  contracts  to  give  B  $100  for  B's  horse.  A  assigns  the 
contract  to  C.  Upon  tender  of  the  $100  C  is  entitled  to  the  horse.  So  also 
B  could  assign  the  right  to  receive  the  money. 

3.  A  contracts  to  give  B  his  note  for  $100  for  B's  horse.  A  assigns  the 
contract  to  C.  B  is  not  bound  to  take  C's  note,  nor  is  he  bound  to  deliver 
the  horse  to  C  unless  the  latter  tenders  A's  note. 

4.  C  agrees  to  work  for  D  in  D's  store  for  $30  a  month.  D  sells  the 
store  to  E  and  assigns  to  him  the  contract  with  C  for  services.  C  is  not 
obliged  to  work  for  E  under  the  contract. 

5.  F  assigns  to  H  a  contract  with  G  by  which  G  agreed  to  deliver  100 
bushels  of  oats  in  exchange  for  F's  horse.  H  sues  G  for  breach  in  refusing 
to  deliver  the  oats  after  receiving  the  horse.  G  sets  up  that  F  fraudulently 
represented  the  horse  to  be  sound  and  claims  an  offset  in  damages.  H  is 
subject  to  this  defense  precisely  as  F  would  have  been. 

35.  Negotiability  of  certain  contracts.  Contracts  contained 
in  written  instruments  that  are  negotiable,  such  as  bills  of 
exchange,  promissory  notes,  and  checks,  may  be  transferred 
by  negotiation  from  hand  to  hand  so  that  each  new  holder 
may  recover  upon  them.  Moreover,  the  transferee,  if  a  holder 
for  value  and  without  notice,  is  not  subject  to  the  personal 
defenses  which  might  have  been  set  up  against  the  transferror. 
This  incident  of  negotiability  is  a  peculiar  attribute  of  these 


§  36]  ASSIGNMENT  5 1 

instruments  and  will  be  more  fully  discussed  under  the  head  of 
Negotiable  Paper. 

The  distinction  between  assignability  and  negotiability  may 
be  thus  illustrated. 

1.  "  On  demand  I  promise  to  deliver  to  John  Doe  100  bushels  of  wheat 
at  eighty  cents  a  bushel.     Richard  Roe." 

Indorsed:  "  For  value  received,  I  hereby  assign  this  contract  to  J.  S. 
Dale.     John  Doe." 

2.  "  On  demand  I  promise  to  pay  to  the  order  of  John  Doe  one  hundred 
dollars,  value  received.      Richard  Roe." 

Indorsed:  "  Pay  to  J.  S.  Dale.     Johx  Doe." 

The  first  instrument  is  a  common  law  contract.  It  is  assigned 
by  the  promisee,  John  Doe,  to  J.  S.  Dale.  The  assignee,  Dale, 
may  maintain  an  action  against  the  promisor,  Richard  Roe,  in 
case  the  latter  refuses  to  deliver  the  wheat  upon  tender  of  the 
price.  At  common  law  Dale  would  have  to  sue  in  the  name  of 
the  assignor,  Doe,  and  he  would  be  subject  to  whatever  defenses 
might  have  been  set  up  had  Doe  brought  the  action  himself,  as, 
for  example,  that  there  was  mistake  or  fraud  in  the  contract. 
He  may  now  generally,  under  statutory  provisions,  sue  in  his 
own  name,  but  he  is  still  subject  to  the  same  defenses. 

The  second  instrument  is  a  negotiable  promissory  note.  It 
is  indorsed  by  the  promisee,  John  Doe,  to  J.  S.  Dale.  The 
indorsee,  Dale,  may  maintain  an  action  in  his  own  name 
against  the  maker,  Richard  Roe,  in  case  the  latter  fails  to  pay 
at  maturity ;  and  if  he  gave  value  and  had  no  notice  of  any 
defense,  like  mistake  or  fraud,  he  will  not  be  subject  to  such 
defense  even  though  Doe  would  have  been  subject  to  it  if  he 
had  retained  the  note  and  brought  the  action. 

The  rules  of  negotiability  came  into  the  law  from  the  custom 
of  merchants,  and  are  peculiar  to  a  class  of  instruments  known 
as  negotiable  paper. 

36.  Assignment  by  operation  of  law.  Where  a  contracting 
party  dies,  most  contracts  which  he  might  have  assigned  during 
his  life  pass  to  his  executor  or  administrator,  who  may  sue  or 
be  sued  upon  them.  Contracts  for  personal  services  do  not 
survive    the   death    of    either    party,    and    contracts    requiring 


52  DISCHARGE  OF  CONTRACTS  [Ch.  Ill 

long-ccntinued  operations  or  conduct  of  business  by  an  adminis- 
trator will  not  be  deemed  to  survive. 

So  where  a  person  becomes  a  bankrupt  his  right  to  enforce 
contract  obligations  passes  to  his  trustee  in  bankruptcy;  but 
the  trustee  would  not  be  bound  to  enter  upon  performance 
inconsistent  with  the  purpose  of  winding  up  the  bankrupt's 
affairs. 

At  common  law  a  husband  upon  marrying  became  entitled  to 
all  his  wife's  personal  property  and  could  enforce  her  claims 
growing  out  of  contract.  Conversely  he  became  liable  for  her 
antenuptial  debts.  But  these  common  law  rules  have  been 
almost  everywhere  swept  away  by  statutes  giving  married 
women  the  control  of  their  own  property  and  making  them 
liable  for  their  own  contracts. 

III.  Discharge  of  Contracts 

37.  Discharge  by  agreement  including  performance.  An  agree- 
ment to  discharge  a  contract  may  be  made  by  the  parties  to  it 
after  it  is  created,  or  the  agreement  as  to  a  method  of  dis- 
charge may  be  contained  in  the  contract  itself. 

i.  Waiver  or  rescission.  When  a  bilateral  contract  has  been 
concluded  and  is  a  binding  agreement,  the  parties  to  it,  by  a 
new  agreement,  may  contract  to  discharge  it.  The  considera- 
tion is  the  mutual  release  of  A  by  B  and  of  B  by  A  from  any 
further  liability  under  it.  If  the  contract  has  been  performed 
by  A  but  not  by  B,  A  may  release  B,  but  there  must  be  some 
consideration  for  the  release  or  it  must  be  under  seal. 

Examples:  i.  A  agrees  to  sell  and  B  to  buy  A's  book  for  $i.  A  and  B 
then  mutually  agree  to  release  each  other.  A's  promise  to  release  B  is  the 
consideration  for  B's  promise  to  release  A,  and  vice  versa. 

2.  A  lias  delivered  the  book  to  B,  and  B  now  owes  A  $i.  A  promises 
B  not  to  claim  the  dollar,  that  is,  releases  B  from  liability.  The  promise 
is  not  enforceable ;  there  is  no  consideration  for  it.  B  gives  A  fifty  cents 
and  A  releases  B  from  the  balance.  Still  there  is  no  consideration ;  a 
smaller  sum  is  not  consideration  for  a  larger.  B  gives  A  a  ten-cent  pencil 
in  consideration  of  A's  promise  to  release  him ;  the  promise  is  enforceable 
and  B  is  no  longer  liable  to  A.    A  gives  B  a  release   under   seal ;    it  is 


§37]  BY  AGREEMENT  53 

enforceable  and  B  is  released.  A  release  under  seal  might  be  as  follows : 
"For  value  received,  I  hereby  release  and  discharge  B.B.  from  all  claims 
for  the  unpaid  portion  of  the  purchase  price  of  X  book.  Witness  my  hand 
and  seal  this  seventh  day  of  February,  1905.    A.A.  [Seal]." 

2.  Substituted  contract.  The  parties  may  by  agreement  sub- 
stitute a  new  contract  for  an  existing  one. 

Example  3.  A  agrees  to  dig  a  well  for  B  for  $50.  A  complains  that  he 
will  lose  money  owing  to  the  presence  of  rock  which  had  not  been  contem- 
plated. It  is  agreed  that  A  shall  dig  the  well  and  that  B  shall  pay  him  $75. 
This  may  be  treated  as  a  substituted  contract  and  thus  escape  the  difficul- 
ties mentioned  in  sec.  19,  Ex.  4,  ante. 

3.  Provisions  for  discJiarge.  The  contract  itself  may  contain 
certain  provisions  looking  to  a  discharge  under  specified  con- 
tingencies, as,  for  example,  an  agreement  that  either  party  may 
terminate  it  upon  thirty  days'  notice.  Insurance  contracts  or 
policies  provide  for  a  discharge  in  case  of  increase  of  risk,  as 
in  case  the  property  remains  vacant  and  unoccupied  for  more 
than  ten  days,  and  the  like. 

4.  Discharge  by  performance.  If  in  accordance  with  the  terms 
of  the  contract  either  party  performs  what  he  has  promised  to 
perform,  he  is  discharged.  If  both  perform,  the  contract  is  dis- 
charged or  executed.  Tender  is  an  attempted  performance  ;  if 
it  is  accepted,  it  discharges  the  one  making  it ;  if  it  is  refused, 
it  discharges  him  unless  his  contract  is  for  the  payment  of 
money,  in  which  case  he  is  still  liable  on  his  debt  but  may  plead 
the  tender  against  a  claim  for  interest  or  the  costs  of  an  action. 
A  tender  of  money  to  be  technically  good  must  be  of  the  exact 
amount  due  and  in  legal-tender  money. 

Legal-tender  money  in  payment  of  private  debts  consists  of  any  gold 
coin,  silver  dollars,  United  States  notes  ("greenbacks"),  and  United 
States  Treasury  notes,  to  any  amount ;  fractional  silver  coins  to  the  amount 
of  ten  dollars  ;  nickel  and  copper  coins  to  the  amount  of  twenty-five  cents. 
Gold  and  silver  certificates  and  national  bank  notes  are  not  legal-tender 
money,  but  are  ordinarily  received  in  payment  of  debts  without  objection. 

A  tender  of  a  check  or  note  of  a  debtor  need  not  be  accepted  in  place  of 
money.  If  it  is  accepted,  it  is  (in  most  states)  regarded  as  merely  a  con- 
ditional payment  unless  otherwise  expressly  stipulated.  If  the  check  or 
note  is  not  paid,  the  creditor  can  either  sue  upon  it  or,  by  returning  it,  sue 
upon  the  original  claim  for  which  it  was  given.    But  if  the  creditor  takes 


54  DISCHARGE  OF  CONTRACTS  [Ch.  Ill 

the  note  of  some  third  person,  which  is  the  property  of  the  debtor,  it  is 
regarded  presumptively  as  payment,  just  as  if  he  had  taken  a  horse  or  other 
corporeal  chattel  owned  by  the  debtor. 

Before  a  party  to  a  contract  can  be  said  to  have  performed  he 
must  have  fully  and  exactly  done  what  he  promised.  But  in 
contracts  for  building  or  executing  work  with  many  specifica- 
tions and  details  a  deviation  that  is  slight  and  not  willful  may 
be  overlooked  on  the  doctrine  of  substantial  performance.  The 
contractor,  while  he  may  recover  upon  such  substantial  perform- 
ance, must  deduct  from  his  recovery  the  amount  the  other  party 
is  damaged  by  the  deviation.  A  deviation  which  is  more  than 
slight  or  trivial,  or  which  is  willful,  will  defeat  a  recovery  because 
it  is  not  regarded  as  performance,  and  the  contractor  is  not 
therefore  discharged  from  his  obligation. 

Example  4.  A  agrees  to  build  a  house  for  B  for  $11,700.  He  has 
fully  completed  it  according  to  specifications,  except  that  there  are  some 
slight  defects  in  the  plastering.  This  is  substantia]  performance  and  A  may 
recover  the  contract  price  less  an  offset  for  the  defect,  which  was  in  this 
case  held  to  be  $200.  But  if  the  deviation  was  willful  or  excessive,  A  could 
not  recover.  One  court  says  :  "  It  may  be  harsh  doctrine  to  hold  that  a  man 
who  has  built  a  house  shall  have  no  pay  for  it,  but  the  fault  is  with  the  one 
who  voluntarily  violates  his  contract." 

If  one  agrees  to  perform  to  the  satisfaction  of  another,  and 
the  matter  is  one  of  personal  taste,  he  cannot  recover  until 
the  other  is  satisfied.  But  if  it  is  a  matter  which  is  not  one  of 
mere  personal  taste,  and  the  work  would  be  lost  if  it  were  not 
accepted,  the  other  must  be  satisfied  when  he  ought  reasonably 
to  be  satisfied. 

Examples :  5.  A  agrees  to  paint  the  picture  of  B's  wife  to  B's  satis- 
faction. B  is  not  pleased  with  it.  He  is  not  obliged  to  take  it.  A  has  not 
performed  his  contract. 

6.  A  agrees  to  put  in  boilers  in  B's  factory  to  B's  satisfaction.  A  puts  in 
the  boilers.  B  is  not  satisfied.  But  if  a  reasonable  man  would  say  B  should 
be  satisfied,  A  has  fulfilled  his  contract  and  B  is  liable. 

38.  Discharge  by  impossibility  of  performance.  A  contract  may 
be  discharged  by  an  impossibility  existing  at  the  time  it  is 
made.  In  only  the  excepted  cases  will  subsequent  impossibility 
discharge  a  contract. 


§38]  BY  IMPOSSIBILITY  55 

1.  Prior  impossibility.  If  impossibility  exists  and  is  known 
when  the  contract  is  made,  there  is  no  contract,  because  the 
promise  to  do  an  impossible  act  is  not  a  real  consideration  for 
the  counter  promise  or  act.  If  the  impossibility  is  not  known, 
as  if  the  subject-matter  does  not  exist  when  the  contract  is 
made,  the  contract  is  ineffective,  because  there  is  no  subject- 
matter  upon  which  it  can  operate. 

2.  Subsequent  impossibility .  If  an  unforeseen  difficulty  arises 
subsequent  to  the  formation  of  the  contract,  it  will  not,  save  in 
the  cases  enumerated,  discharge  the  contract. 

Example  1.  A  agrees  to  sell  and  deliver  to  B  a  quantity  of  beans  to 
be  raised  by  A.  A's  crop  is  destroyed  by  frost.  A  is  liable  for  a  breach  of 
contract,  since  although  he  cannot  deliver  beans  from  his  own  land  he  can 
procure  them  elsewhere,  and  there  is  not,  therefore,  a  real  impossibility. 
If,  however,  it  had  been  specified  that  A  was  to  deliver  the  beans  grown  in 
a  particular  field,  and  the  crop  in  that  field  had  been  destroyed,  there  would 
have  been  an  impossibility  due  to  the  destruction  of  the  subject-matter. 

The  following  cases  of  impossibility  arising  subsequent  to 
the  formation  of  the  contract  will  discharge  the  contract. 

(a)  Legal  impossibility.  If  the  impossibility  is  created  by 
a  change  in  the  laws,  or  by  an  act  of  law,  the  promisor  is 
discharged. 

Examples :  2.  A  leases  a  wooden  building  to  B  and  agrees  in  case  it 
burns  to  rebuild  it.  It  burns  and  B  demands  that  it  be  rebuilt.  A  defends 
upon  the  ground  that  since  the  contract  was  made  the  city  by  ordinance 
has  forbidden  the  erection  of  wooden  buildings.  The  defense  is  good. 
A  is  not  obliged  to  build  except  in  wood,  and  the  law  prevents  him  from 
building  in  that  material. 

3.  A  agrees  to  work  for  B  for  three  months.  At  the  end  of  a  month  A 
is  arrested  and  imprisoned.  His  contract  is  discharged  since  the  law  by 
constraining  him  has  made  it  impossible  for  him  to  perform. 

(b)  Destruction  of  the  subject-matter  of  tJic  contract.  Where 
the  existence  of  a  specific  thing  is  essential  to  performance, 
the  contract  is  discharged  if  the  thing  is  destroyed  through  no 
fault  of  the  parties. 

Examples:  4.  A  agrees  to  let  B  occupy  a  hall  for  public  entertainments. 
Before  the  time  for  occupation  arrives  the  hall  is  destroyed  by  fire.  The 
contract  is  discharged. 


56 


DISCHARGE  OF  CONTRACTS  [Ch.  Ill 


5.  A  sells  B  a  buggy  and  agrees  to  repaint  it  and  deliver  it  in  thirty 
days.  Before  the  work  is  finished  the  buggy  is  destroyed  by  fire.  The 
contract  is  discharged.  Neither  party  has  any  action  against  the  other. 
(If  the  buggy  had  been  in  a  deliverable  condition,  the  title  would  have 
passed  to  B  at  once,  and  he  would  have  been  obliged  to  pay  the  agreed 
price  although  he  had  left  the  buggy  in  A's  hands.  This  is  more  fully 
explained  under  the  head  of  Sales.) 

6.  When  work  is  to  be  done  by  A  upon  an  article  belonging  to  B,  the 
destruction  of  the  article  discharges  the  contract,  but  A  may  recover  for 
the  work  performed  upon  it  before  its  destruction. 

7.  One  may  contract  against  loss  or  destruction.  For  example,  A  hires 
a  boat  and  contracts  that  in  case  of  loss  he  shall  pay  a  specified  sum.  The 
boat  is  lost  in  a  storm  without  A's  fault.    A  is  bou«nd  to  pay  as  agreed. 

(c)  Death  or  disability  in  the  case  of  contract  for  personal 
services.  If  the  contract  is  for  personal  services,  the  death  or 
incapacity  of  the  one  who  is  to  perform  such  services  will  dis- 
charge the  contract. 

Examples:  8.  A  musician  contracts  to  play  at  a  theater.  Owing  to 
illness  he  is  unable  to  do  so.  The  theater  manager  sues  for  damages  for 
breach.  He  cannot  recover.  The  illness  and  consequent  incapacity  of  the 
musician  discharges  the  contract. 

9.  An  unforeseen  peril,  as  the  prevalence  of  a  dangerous  contagious 
disease,  may  operate  to  discharge  a  contract  for  personal  services  within  the 
infected  district. 

10.  The  death  of  a  master  or  of  a  servant  discharges  the  contract  as 
between  the  survivor  and  the  executor  or  administrator  of  the  deceased 
person. 

39.  Discharge  by  breach.  A  contract  may  be  indivisible  or 
divisible  and  the  promises  may  be  mutually  dependent  or  may 
be  independent. 

I.  Where  the  promises  on  each  side  are  mutually  dependent 
and  the  contract  is  an  indivisible  one,  a  breach  of  performance 
by  one  party  will  discharge  the  other  from  performance  and 
will  give  that  other  an  action  for  damages  against  the  one  in 
default.  A  positive  assertion  by  one  party,  prior  to  the  time 
fixed  for  performance,  that  he  will  not  perform,  is  an  anticipatory 
breach  and  gives  the  other  party  an  immediate  right  of  action. 
If  one  party  tells  the  other  to  stop  performance,  the  latter 
cannot  by  going  on  add  to  the  damages  for  the  breach. 


§39]  BY  BREACH  57 

Example  1.  A  agrees  to  sell  a  horse  to  B  for  $100.  A  refuses  to 
deliver  the  horse  and  receive  the  purchase  price.  B  is  discharged  from  any 
further  obligation  ;  he  is  not  bound  to  receive  the  horse  in  case  A  should 
afterwards  tender  it,  or  to  pay  anything  to  A  ;  and  he  may  maintain  an  action 
for  damages  against  A  for  the  refusal  to  deliver  when  performance  was  due. 

2.  If,  however,  the  contract  is  a  divisible  one,  that  is,  made 
up  really  of  a  series  of  contracts,  then  the  breach  of  one  part 
will  not  discharge  the  other  parts.  The  difficulty  in  these  cases 
is  in  determining  whether  a  contract  is  divisible  or  indivisible. 

Example  2.  A  contracts  to  sell  B  1200  tons  of  coal  in  twelve  monthly 
installments  of  100  tons.  The  English  court  held  this  to  be  a  divisible  con- 
tract, and  that  a  breach  in  performance  as  to  one  installment  would  not  dis- 
charge the  contract  as  to  the  remaining  installments.  The  Supreme  Court 
of  the  United  States  held  such  a  contract  to  be  an  indivisible  one  for  the 
full  amount  specified,  that  the  provision  as  to  installments  was  subsidiary, 
and  that  a  breach  as  to  any  installment  would  discharge  the  entire  contract. 
Generally  in  the  United  States  such  contracts  are  regarded  as  indivisible. 

3.  Sometimes  promises  are  not  mutually  dependent,  and  in 
such  a  case  a  failure  of  performance  on  one  side  may  not  dis- 
charge a  promise  on  the  other. 

Example  3.  A  agrees  to  pay  a  certain  rent  for  B's  house  and  B  agrees 
to  allow  A  to  occupy  the  house  for  one  year  and  to  give  A  the  option  to 
renew  the  lease  for  a  second  year.  A  falls  in  arrears  upon  his  rent  and  B 
refuses  to  renew  the  lease.  It  is  held  that  the  covenant  to  renew  is  inde- 
pendent of  the  promise  to  pay  the  rent,  and  therefore  B  is  not  discharged 
from  the  promise  to  renew  because  of  A's  breach  of  the  promise  to  pay. 
These  cases  are  not  very  common,  and  the  construction  is  so  technical  as  to 
be  chiefly  the  business  of  lawyers. 

4.  A  warranty  is  a  subsidiary  promise  attached  commonly 
to  a  contract  of  sale.  The  breach  of  the  warranty  gives  rise  to 
an  action  for  damages  but  does  not  generally  discharge  the 
main  contract. 

Example  4.  A  sells  B  a  horse  and  innocently  warrants  it  to  be  sound. 
After  B  has  taken  the  horse  he  discovers  that  it  is  unsound  and  attempts 
to  compel  A  to  take  it  back  and  repay  the  purchase  money.  Many  courts 
hold  that  this  cannot  be  done  and  that  B's  only  remedy  is  an  action  for 
damages  for  the  breach  of  the  warranty ;  but  in  Massachusetts  and  some 
other  states  B  is  allowed  to  rescind  (see  sec.  57  post). 


58  DISCHARGE  OF  CONTRACTS  [Ch.  Ill 

40.  Remedies  for  breach  of  contract.  In  case  a  contract  is 
broken  by  one  party  to  it  these  results  follow  : 

(i)  the  other  party  is  exonerated  from  further  performance 
on  his  part ; 

(2)  he  has  an  action  for  breach  of  the  contract  in  which  he 
may  recover  as  damages  the  contract  price  of  whatever  he  has 
delivered  or  done,  and  also  for  any  loss  sustained  by  being  pre- 
vented from  completing  the  contract ;    or 

(3)  by  treating  the  contract  as  entirely  abandoned,  he  may, 
if  he  chooses,  recover  the  value  of  whatever  he  may  have  him- 
self already  performed,  that  is,  he  may  proceed  upon  an  implied 
promise  to  pay  a  reasonable  price  or  compensation. 

Examples  :  1.  A  sells  10,000  feet  of  lumber  to  B  at  $20  a  thousand  feet. 
A  delivers  4000  feet,  when  B  refuses  to  receive  the  remainder.  A  is  not  bound 
to  deliver  or  tender  any  more.  A  may  sue  for  breach  of  contract  and  recover 
$80  (the  contract  price  of  that  delivered)  phis  the  profit  he  would  have 
made  upon  the  remaining  6000  feet,  which,  assuming  the  lumber  cost  A  $15  a 
thousand  and  is  now  worth  in  the  market  only  $15  a  thousand,  would  be  $30. 

2.  Or,  if  A  chooses  to  disregard  the  express  contract,  he  may  sue  as 
upon  an  implied  contract  and  recover  the  market  value  of  the  lumber  actu- 
ally delivered.  Assuming  this  is  $25  a  thousand,  A  could  recover  $100,  but 
he  could  not  recover  for  any  loss  of  profits  upon  the  portion  undelivered. 
In  case  A  has  contracted  to  sell  this  lumber  to  B  at  too  low  a  price,  this 
alternative  would  be  preferable. 

3.  A  buys  a  quantity  of  turnip  seed  of  B,  who  represents  the  seed  to  be 
of  a  particular  variety  suitable  to  grow  turnips  for  early  market.  A  plants 
the  seed,  and  the  turnips  raised  from  them  are  of  a  late  variety,  fit  only  for 
cattle.  A  may  recover  as  damages  the  difference  between  the  market  value 
of  the  crop  he  raised  and  that  of  the  crop  he  might  have  raised  had  the 
seed  been  as  represented. 

In  certain  classes  of  cases,  where  damages  would  be  an  inade- 
quate remedy,  the  injured  party  may  obtain  from  an  equity 
court  an  order  that  the  other  party  specifically  perform  his 
promise.  Contracts  for  the  conveyance  of  land  are  thus  spe- 
cifically enforced,  and  contracts  for  the  transfer  of  chattels  may 
be  specifically  enforced  if  the  chattel  is  one,  like  a  patented 
article,  which  cannot  be  procured  elsewhere  than  of  the  vendor. 

Actions  for  the  breach  of  contracts  must  be  brought  within 
the  time  fixed  by  the  Statute  of  Limitations.    In  case  of  simple 


§§4i,42]  BY  BANKRUFI'CY  59 

contracts  this  is  usually  from  three  to  six  years,  and  in  the  case 
of  sealed  contracts  from  ten  to  twenty  years.  The  statutes 
differ  somewhat  in  the  different  states.  When  more  than  the 
prescribed  time  has  elapsed  since  the  breach,  the  contract  or 
right  of  action  upon  it  is  said  to  be  "  outlawed,"  that  is,  it  is 
barred  by  the  statute.  But  a  debt  may  be  revived  by  a  new 
promise  to  pay  it  after  it  is  barred  by  the  Statute  of  Limitations, 
although  nearly  all  the  states  now  require  such  a  promise  to  be 
in  writing.  A  part  payment  after  the  debt  is  barred  will  also 
revive  the  whole  claim. 

IV.  Discharge  in  Bankruptcy 

41.  Insolvency  laws  not  discharging  debtor.  At  common  law 
debtors  could  be  imprisoned  for  debt,  and  such  imprisonment 
might  be  of  indefinite  duration.  It  was  not  until  1759  that 
Parliament  passed  a  general  and  comprehensive  act  for  their 
relief.  This  act  provided  that  prisoners  in  custody  for  debts 
under  ,£100  (afterwards  extended  to  ^200)  might  secure  their 
release  by  making  an  assignment  of  all  their  property,  with  some 
trifling  exceptions,  for  the  benefit  of  their  creditors  ;  the  debtor, 
however,  was  not  discharged  from  civil  liability  for  the  unpaid 
portion  of  his  debts.  This  was  the  origin  of  insolvency  laws 
under  which,  after  the  abolition  of  imprisonment  for  debt,  insol- 
vent debtors  continued  to  make  assignments  for  the  benefit  of 
creditors  in  order  that  all  might  share  pro  rata  in  the  available 
assets.  These  laws  were  extended  in  England  and  in  some  of 
our  states  so  as  to  enable  creditors  to  compel  an  insolvent  to 
make  an  assignment  of  his  property  for  their  benefit  and  to  give 
the  debtor  a  discharge  from  further  liability.  When  they  reach 
this  point  they  are  indistinguishable  from  bankruptcy  laws. 

42.  Bankruptcy  laws  discharging  debtor.  Bankruptcy  laws  are 
older  than  insolvency  laws  but  were  originally  applied  only  to 
traders  or  persons  in  mercantile  pursuits.  They  were  framed 
to  enable  creditors  to  compel  a  bankrupt  trader  to  turn  over 
his  property  for  their  benefit.  They  were  extended  for  the 
benefit  of  the  trader,  so  that  upon  turning  over  all  his  property 


60  DISCHARGE  OF  CONTRACTS  [Ch.III 

for  the  payment  of  his  debts  the  bankrupt  became  discharged 
from  further  liability  and  could  begin  business  again  free  from 
the  burden  of  former  debts.  They  were  further  extended  so  as 
to  apply  to  all  persons,  whether  traders  or  not,  and  to  enable  a 
debtor  to  go  into  voluntary  bankruptcy  and  secure  a  discharge. 
Thus,  by  an  extension  of  insolvency  laws  so  as  to  discharge  a 
debtor  from  his  debts  as  well  as  from  imprisonment,  and  by  an 
extension  of  the  bankruptcy  laws  to  include  all  debtors,  the  two 
classes  of  laws  became  practically  alike. 

43.  The  state  insolvency  laws.  Our  American  states  have 
passed  laws  which  sometimes  resemble  insolvency  laws  and 
sometimes  resemble  bankruptcy  laws.  The  main  distinction  to 
be  observed  is  whether  upon  assigning  all  his  property  for  the 
benefit  of  his  creditors  the  debtor  is  discharged  from  further 
liability  for  his  debts  then  existing.  If  so,  the  law  whatever  it 
may  be  called  is  practically  a  bankruptcy  law;  if  not,  it  is 
practically  an  insolvency  law. 

Any  state  law  which  is  in  effect  a  bankruptcy  law  is  now 
suspended  by  the  National  Bankruptcy  Law  which  went  into 
effect  July  I,  1898  (see  next  section). 

Any  state  law  which  merely  governs  the  voluntary  assign- 
ment of  property  for  the  benefit  of  creditors,  and  is  to  that 
extent  an  insolvency  law,  is  not  suspended;  but  a  voluntary 
assignment  for  the  benefit  of  creditors  is  an  act  of  bankruptcy 
and  the  creditors  may  bring  the  assigning  debtor  under  the 
National   Bankruptcy  Law  if  they  choose. 

44.  National  Bankruptcy  Law  of  1898.  The  Constitution  of 
the  United  States  confers  upon  Congress  the  power  "  to  estab- 
lish uniform  laws  on  the  subject  of  bankruptcies  throughout  the 
United  States."  If  Congress  does  not  pass  such  laws,  the  states 
are  free  to  do  so.  But  if  Congress  does  pass  such  laws,  the  state 
bankruptcy  laws  cease  to  operate  while  such  national  statutes 
are  in  force.  National  bankruptcy  laws  have  been  in  operation 
from  1800  to  1803,  from  1841  to  1843,  from  1867  to  1878,  and 
since  July  1,  1898.  The  state  laws  are  therefore  now  sus- 
pended, but  would  revive  if  the  federal  statute  were  repealed. 
If  a  person  is  discharged  in  bankruptcy  from  his  debts,  he  may 


§44]  BY  BANKRUPTCY  6 1 

revive  any  of  them  by  an  express  promise  to  pay  them.  Such 
promise  requires  no  new  consideration  ;  it  simply  waives  the 
bar  raised  by  the  discharge  in  bankruptcy. 

The  United  States  Bankruptcy  Law  provides  that  "  Acts  of  bankruptcy 
by  a  person  shall  consist  of  his  having  (i)  conveyed,  transferred,  concealed, 
or  removed,  or  permitted  to  be  concealed  or  removed,  any  part  of  his  prop- 
erty with  intent  to  hinder,  delay,  or  defraud  his  creditors,  or  any  of  them ; 
or  (2)  transferred,  while  insolvent,  any  portion  of  his  property  to  one  or 
more  creditors  with  intent  to  prefer  such  creditors  over  his  other  creditors; 
or  (3)  suffered  or  permitted,  while  insolvent,  any  credito-  to  obtain  a  prefer- 
ence through  legal  proceedings  .  .  .  ;  or  (4)  made  a  general  assignment  for 
the  benefit  of  his  creditors  ;  or  (5)  admitted  in  writing  his  inability  to  pay 
his  debts  and  his  willingness  to  be  adjudged  a  bankrupt  on  that  ground." 

It  further  provides  that  "A  person  shall  be  deemed  insolvent  whenever 
the  aggregate  of  his  property,  exclusive  of  any  property  which  he  may  have 
conveyed,  transferred,  concealed,  or  removed,  or  permitted  to  be  concealed 
or  removed,  with  intent  to  defraud,  hinder,  and  delay  his  creditors,  shall  not 
at  a  fair  valuation  be  sufficient  in  amount  to  pay  his  debts." 

It  further  provides  that  (a)  any  person  who  owes  debts,  except  a  cor- 
poration, shall  be  entitled  to  the  benefits  of  this  act  as  a  voluntary  bank- 
rupt ;  (/>)  any  natural  person  (except  a  wage-earner  at  a  rate  not  exceed- 
ing 51500  a  year,  or  a  person  engaged  chiefly  in  farming  or  the  tillage 
of  the  soil),  any  unincorporated  company,  and  any  corporation  engaged 
principally  in  manufacturing,  trading,  printing,  publishing,  or  mercantile 
pursuits,  owing  debts  to  the  amount  of  $1000  or  over,  may  be  adjudged  an 
involuntary  bankrupt ;  (V)  a  partnership,  during  the  continuation  of  the 
partnership  business,  or  after  its  dissolution,  and  before  a  final  settlement 
thereof,  may  be  adjudged  a  bankrupt. 

It  further  provides  for  the  discharge  of  the  bankrupt  unless  he  has  been 
guilty  of  fraud  or  concealment.  The  discharge  releases  him  from  all  his 
debts  except  taxes,  judgments  for  fraud  or  for  willful  injuries,  debts  not 
scheduled  in  time  for  proof  and  allowance,  or  debts  created  by  fraud  or 
embezzlement  while  acting  as  an  officer  or  in  any  fiduciary  capacity. 

The  claims  provable  against  a  bankrupt  include  judgments,  open 
accounts  and  contracts,  and  instruments  in  writing  whether  yet  payable  or 
not,  such  as  promissory  notes.  Claims  that  must  be  enforced  in  tort  actions 
are  not  provable  unless  already  reduced  to  judgment,  in  which  case  the 
judgment  is  provable. 


62  DISCHARGE  OF  CONTRACTS  [Ch.  Ill] 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  32.  Who  are  liable  on  contracts  ?  What  exception  to  this  rule  ? 
How  may  a  third  person  render  himself  liable  by  interfering  with  a  contract? 
What  is  a  boycott? 

33.  May  a  third  person  (X)  sue  upon  a  contract  made  by  A  and  B  ? 
Under  what  circumstances  ?  May  a  person  not  named  in  the  contract 
between  A  and  B  sue  upon  it  ?    When  ? 

Problem  i.  B  engages  A  to  make  an  abstract  of  B's  title  to  real  property. 
A  negligently  fails  to  note  on  the  abstract  a  recorded  mortgage  which  is  a 
lien  on  the  lands.  B  wishes  to  borrow  money  of  X  upon  mortgage  and 
gives  him  the  abstract  which  shows  the  land  clear  of  incumbrances.  X  loans 
the  money  and  takes  a  mortgage.  He  then  discovers  the  prior  mortgage. 
The  land  is  insufficient  in  value  to  pay  both  mortgages  and  X  suffers  loss. 
He  sues  A  for  damages.    Can  he  recover? 

34.  Why  can  a  person  not  assign  his  liabilities?  What  rights  under  a 
contract  can  one  assign?  What  rights  can  he  not  assign?  What  does  the 
assignee  get  ? 

Problem  2.  B  contracted  to  sell  to  X  10,000  tons  of  ore  at  the  rate  of 
50  tons  a  day,  to  become  the  property  of  X  when  delivered.  After  delivery 
the  ore  was  to  be  sampled  and  assayed  and  the  price  fixed  by  the  daily 
market  quotation.  X  assigned  the  contract  to  C.  B  refused  to  deliver  to 
C,  who  sues  B  for  damages.    Is  B  liable  ? 

Problem  j.  B  contracted  to  make  certain  articles  for  X  to  be  used  by  him 
in  his  business  and  to  be  paid  for  when  delivered.  X  sold  his  business  to 
C  and  assigned  this  contract  to  C.  B  refused  to  supply  the  articles  to  C, 
who  sues  B  for  damages.    Is  B  liable  ? 

Problem  4.  B  contracts  to  sing  at  X's  theater.  X  sells  the  theater  to  C 
and  assigns  B's  contract  to  C.  B  refuses  to  sing,  and  C  sues  B  for  breach 
of  contract.    Is  B  liable  ? 

35.  Distinguish  assignability  from  negotiability.  To  what  contracts  does 
the  latter  apply? 

36.  What  effect  does  the  death  of  a  party  have  upon  a  contract?  What 
contract  obligations  do  not  survive  death  ?  What  is  the  effect  of  the  bank- 
ruptcy of  a  party  to  a  contract?  At  common  law  what  was  the  effect  of 
marriage  upon  a  woman's  contracts?    How  is  this  changed  by  statutes? 

37.  How  may  parties  by  agreement  discharge  their  contracts?  Does  a 
bilateral  contract  need  a  new  consideration  for  mutual  discharge  ?  Does 
a  unilateral  contract?  Give  an  example  of  substituted  contract  and  of  a 
contract  containing  provisions  for    a    discharge.     What  is  discharge  by 


REVIEW  QUESTIONS  AND  PROBLEMS  63 

performance  ?  What  is  the  effect  of  tender  of  performance  ?  What  is  legal- 
tender  money  ?  What  is  the  effect  of  taking  a  debtor's  check  ?  What  is  the 
doctrine  of  substantial  performance  ?  What  is  the  effect  of  promising  to 
perform  to  the  satisfaction  of  another? 

Problem  3.  C  sold  B  a  horse  on  condition  that  B  might  use  it  and,  if  he 
did  not  like  it,  might  return  it.  B  used  the  horse  so  badly  that  it  was 
injured.  B  then  offered  to  return  it,  but  C  refused  to  receive  it  and  sued 
for  the  price.    Can  he  recover  ? 

38.  Effect  of  impossibility  existing  when  contract  is  made  ?  existing 
and  not  known  ?  arising  subsequently  ?  What  three  exceptions  to  the  gen- 
eral rule  ?    Explain  and  illustrate  each. 

Problem  6.  B  agreed  to  sell  and  deliver  to  C  607  particular  bales  of  cot- 
ton marked  and  identified.  B  delivered  460  bales,  when  the  remaining  147 
bales  were  destroyed  by  fire  without  fault  of  either  party.  C  sues  B  for 
breach  of  contract  in  not  delivering  the  147  bales.    Is  B  liable? 

Problem  7.  B  engages  C  as  a  farm  servant.  B  dies.  B's  executor  refuses 
to  retain  C  on  the  farm.  C  sues  the  executor  for  breach  of  B's  contract. 
May  he  recover? 

39.  When  will  breach  by  one  party  discharge  the  other?  What  is  an 
anticipatory  breach,  and  what  is  its  effect  ?  When  will  breach  by  one  not 
discharge  the  other  ?  What  are  divisible  contracts  ?  What  are  independent 
promises  ?    Effect  of  breach  of  warranty  ? 

Problem  8.  B  bought  a  quantity  of  iron  of  C  in  January,  1880,  to  be 
delivered  and  paid  for  on  July  15,  18S0.  On  June  12,  18S0,  B  notified  C 
that  he  would  not  receive  or  pay  for  the  iron.  C  sold  the  iron  elsewhere  and 
sued  B  at  once  for  damages  without  waiting  until  July  15.    May  he  recover? 

Problem  g.  B  engaged  C  to  clean  and  repair  certain  pictures  at  a  speci- 
fied price  for  each.  After  C  had  begun  work,  B  countermanded  the  order, 
but  C  persisted  in  finishing  the  work  and  sued  B  for  the  full  contract  price. 
Can  he  recover  ? 

Proble?n  10.  B  buys  C's  farm  tor  $3000  on  these  terms :  $500  down ; 
$1000  in  three  months ;  $1500  in  six  months  ;  the  deed  to  be  delivered  to 
C  at  the  end  of  six  months,  (a)  C  sues  for  the  $1000  at  the  end  of  three 
months,  (b)  C  sues  for  the  $1500  at  the  end  of  six  months.  In  each  case 
B  defends  on  the  ground  that  C  has  not  transferred  the  deed.    Result  ? 

40.  If  A  breaks  his  contract  with  B,  state  B's  rights  and  remedies.  What 
is  specific  performance  and  by  what  court  granted?  What  is  the  Statute 
of  Limitations  ?    How  may  a  debt  barred  by  that  statute  be  revived  ? 

Problem  11.  B  sells  C  10,000  bushels  of  potatoes  at  50  cents  a  bushel 
to  be  delivered  in  quantities  of  500  bushels.  B  delivers  2000  bushels,  when 
C  refuses  to  receive  any  more.    Assume  potatoes  to  be  worth  at  the  time  of 


64  DISCHARGE  OF  CONTRACTS  [Ch.  Ill] 

breach  60  cents  a  bushel,  how  much  may  B  recover  of  C  in  case  he  sues  C 
for  breach  of  the  contract?  How  much  may  he  recover  if  he  disregards  the 
express  contract  and  sues  for  the  value  of  the  potatoes  actually  delivered? 

Problem  12.  If  in  the  above  problem  the  market  price  of  potatoes  at  the 
time  C  commits  the  breach  is  40  cents  a  bushel,  what  will  be  the  most 
advantageous  remedy  for  B  to  pursue  ? 

41.  What  was  the  object  of  the  first  insolvency  laws?    How  extended? 

42.  What  were  bankruptcy  laws  and  for  whose  benefit  were  they  enacted  ? 
How  extended  ? 

43.  What  is  now  the  distinction  between  insolvency  laws  and  bankruptcy 
laws  ?  Are  bankruptcy  laws  in  force  by  state  legislation  ?  Are  insolvency 
laws  ? 

44.  When  have  national  bankruptcy  laws  been  in  force  ?  How  long  has 
the  present  one  been  in  force  ?  Give  some  of  its  provisions.  How  may  a 
person  discharged  in  bankruptcy  revive  his  liability  ? 


PART   II 

PARTICULAR   CONTRACTS   CONCERNING 

GOODS 

CHAPTER  IV 
SALES  OF  GOODS 
I.  The  Contract 

45.  Definition  and  analysis.  A  contract  of  sale  is  a  contract 
whereby  the  seller  transfers  or  agrees  to  transfer  the  property 
in  goods  to  the  buyer  for  a  money  consideration  called  the 
price.  Where  the  result  of  the  contract  is  to  transfer  the  title 
to  the  goods  to  the  buyer  there  is  strictly  a  sale  ;  but  where 
the  title  is  to  be  transferred  at  some  later  time  there  is  only 
an  agreement  to  sell.  The  agreement  to  sell  becomes  a  sale 
when  the  title  is  in  fact  transferred. 

Examples :  I.  "  I  will  sell  you  my  horse  for  $100."  "  I  accept."  This 
is  a  sale.  The  title  passes  at  once.  If  the  horse  dies,  the  loss  falls  on  the 
buyer,  even  though  the  horse  had  not  yet  been  delivered. 

2.  "  I  will  sell  you  my  colt  for  $100  when  he  is  a  year  old."  "  I  accept." 
This  is  an  agreement  to  sell.  The  title  remains  with  the  seller  until  the  colt 
is  a  year  old.  It  then  passes  to  the  buyer  and  the  agreement  to  sell  becomes 
a  sale. 

3.  The  colt  dies  before  he  is  a  year  old,  without  fault  of  either  party. 
The  contract  is  discharged. 

I.  It  is  a  contract.  This  implies  all  the  elements  heretofore 
discussed,  namely,  agreement,  competent  parties,  sufficient  con- 
sideration, in  some  cases  a  particular  form,  legality,  and  real 

65 


66  SALES  OF  GOODS  [Ch.  iv 

assent.  These  need  not  be  again  discussed  at  this  point,  but! 
the  nature  of  the  consideration  (money)  and  the  form  (Statute: 
of  Frauds)  will  call  for  notice  under  another  head.  It  is  also 
important  to  note  that  where  necessaries  are  sold  to  an  infant, 
or  minor,  or  to  a  person  under  mental  incapacity,  as  a  lunatic,! 
he  must  pay  a  reasonable  price  therefor.  What  are  neces^ 
saries  depends  upon  the  social  and  financial  condition  of  tha 
infant  or  lunatic,  and  upon  his  actual  needs  at  the  time  of; 
the  sale  (see  sees.  15  and  16  ante). 

2.  Whereby  the  seller  transfers  or  agrees  to  transfer.    If  the 
seller  transfers  the  property  in  the  goods,  the  sale  is  said  tfl 
be  executed  ;  the  seller's  title  is  divested  ;  the  buyer's  title  in- 
vested.   If  the  seller  merely  agrees  to  transfer  the  property 
in  the  goods,  the  sale  is  said  to  be  executory  ;  the  seller's  title 
is  not  disturbed  ;  the  buyer  has  only  a  right  of  action  under 
the  contract,  and  he  has  not  any  title  in  the  goods.    It  is  one; 
of  the  important  questions  in  the  law  of  sales  as  to  when  the, 
title  passes,  that  is,  whether  the  sale  is  executed  or  executory. 
This  will  be  discussed  hereafter.    It  should  be  observed  that 
the  contract  may  be  executory  while  the  sale  is  executed,  that 
is,  the  agreement  to  pass  title  is  executed  while  the  rest  of  the 
agreements  are  executory. 

Examples  :  4.  "  I  will  sell  you  my  horse  for  $100  and  deliver  him  to  you 
to-morrow  at  your  farm,  you  to  pay  the  money  at  that  time."  "  I  accept." 
This  is  an  executed  sale,  that  is,  the  title  passes  at  once  to  the  buyer;  but 
it  is  still  an  executory  contract,  that  is,  each  party  has  still  something  to  do 
in  the  way  of  performance. 

5.  If,  as  above,  the  seller  and  the  buyer  agree,  but  the  seller  also  agrees 
to  shoe  the  horse  before  delivery,  the  title  does  not  pass  until  the  horse 
is  shod.    This  is  an  executory  sale  and  an  executory  contract. 

3.  Property  in  the  goods.  By  the  term  goods  is  meant,  gener- 
ally, every  kind  of  personal  property,  such  as  corporeal  movable 
property,  like  a  horse  or  a  bushel  of  wheat ;  incorporeal  property, 
like  a  patent  right  or  a  trademark  ;  choses  in  action  ,  like  a  stock 
certificate  or  a  debt.  By  property  is  meant  the  ownership  of 
the  goods  or  the  general  title  to  the  goods.  In  order  to  pass 
this  property  to  the  buyer,  it  is  necessary  that  the  seller  should 


§45]  THE  CONTRACT  67 

have  it,  for  the  general  rule  in  sales  is  that  "a  buyer  acquires 
no  better  title  to  goods  than  the  seller  had."  Three  important 
exceptions  to  this  rule  may  be  noted. 

(a)  In  the  sale  of  negotiable  instruments  the  seller  may  give 
a  better  title  than  he  has  himself. 

(b)  By  the  Factors  Acts  it  is  provided  that  a  factor  or  com- 
mission merchant  who  is  intrusted  with  goods  by  the  owner 
may  sell  or  otherwise  dispose  of  them  and  give  good  title  as 
if  he  were  the  true  owner  of  the  goods  or  had  authority  from  the 
true  owner. 

(c)  If  the  buyer  leaves  the  seller  in  possession  of  the  goods, 
or  of  the  documents  of  title  to  the  goods,  and  the  seller  resells 
and  delivers  them  to  another  innocent  purchaser,  many  courts 
hold  that  the  latter  may  retain  them  as  against  the  first  buyer, 
since  the  first  buyer  has  made  it  possible  for  the  seller  to  com- 
mit the  fraud.  So,  if  the  true  owner  invests  another  person 
with  the  indicia  of  ownership,  and  the  latter  sells  to  an  inno- 
cent purchaser  for  value,  the  true  owner  will  be  estopped  to 
set  up  his  title  against  the  innocent  purchaser. 

But  if  one  sells  and  delivers  goods  to  another,  retaining  title 
in  himself  as  security  for  the  purchase  money,  and  the  buyer 
resells  them  to  an  innocent  purchaser  for  value,  the  latter  gets 
at  common  law  no  title  against  the  first  seller  who  retained  the 
title.  This  has  led  to  such  hardship  upon  innocent  purchasers 
that  statutes  now  generally  provide  that  such  conditional  sales 
shall  be  void  as  against  innocent  purchasers  from  the  vendee 
unless  they  are  in  writing  and  recorded  in  some  public  office. 
The  retention  of  title  is  merely  a  form  of  security,  like  a  chattel 
mortgage,  and  chattel  mortgages  are  not  valid  against  innocent 
purchasers  of  the  mortgaged  chattels  unless  duly  recorded. 

When  the  seller  has  been  induced  by  fraud  of  the  buyer  to 
sell  his  goods  and  part  with  the  possession,  he  may  rescind  the 
contract  and  recover  the  goods.  But  if,  before  he  does  so,  the 
buyer  resells  them  to  an  innocent  purchaser  for  value,  the  latter 
gets  a  title  good  against  the  first  seller. 

Who  is  "  a  purchaser  in  good  faith  and  for  value  "  ?  First,  one 
who  purchases  without  notice  of  his  vendor's  defective  title, 


68  SALES  OF  GOODS  [Ch.  IV] 

or  of  facts  which  should  put  him  upon  inquiry  concerning  the 
title  ;  and  second,  one  who  also  pays  a  valuable  consideration. 
A  promise  to  pay  is  not  sufficient,  since,  if  the  true  owner 
recovers  the  goods,  this  purchaser  will  never  be  obliged  to  pay 
his  vendor.  Whether  taking  the  goods  in  payment  of  an  ante- 
cedent debt  owing  him  from  his  vendor  makes  the  buyer  a 
purchaser  for  value,  the  courts  differ.  Some  hold  it  does  not, 
because  if  the  buyer  has  to  give  up  the  goods  the  debt  is  restored 
and  he  is  in  no  worse  position  than  he  was  before ;  others  hold 
that  it  does  because  the  buyer  has  been  "lulled  into  security,"  and 
may  thereby  lose  the  debt  which  he  otherwise  would  have  col- 
lected. There  is  the  same  difference  of  opinion  where  the  buyer 
takes  the  goods  from  his  vendor  as  collateral  security  (pledge)  for 
a  preexisting  debt.  It  is  generally  held  that  an  attaching  cred- 
itor or  an  assignee  in  bankruptcy  is  not  a  purchaser  for  value. 

Examples :  6.  B  sells  his  horse  to  C,  and  C  allows  B  to  retain  possession. 
B  then  sells  and  delivers  the  horse  to  D,  who  does  not  know  of  the  previous 
sale.  D  may  retain  the  horse  as  against  C,  for  the  latter  by  leaving  B  in 
possession  made  it  possible  to  commit  the  fraud,  and  C  must  suffer  the  loss 
rather  than  D.  (This  is  not  universally  held.  Some  courts  regard  contin- 
ued possession  by  the  vendor  merely  as  evidence  of  fraud,  but  open  to 
honest  explanations.) 

7.  B  owns  a  wagon.  He  rents  it  to  C,  who  paints  on  it,  "  C,  Piano 
Mover,"  and  uses  it  in  his  business.  C  sells  the  wagon  to  D,  who  believes 
C  to  be  the  owner.  B  cannot  reclaim  it  from  D.  He  has  invested  C  with 
the  indicia  of  ownership.  But  if  B  had  merely  rented  the  wagon  without 
authorizing  C  to  put  his  name  on  it,  the  purchaser  would  have  obtained  no 
title  as  against  B. 

8.  B  sells  and  delivers  a  piano  to  C,  but  by  the  contract  retains  title 
until  it  is  fully  paid  for.  C  sells  it  to  D  for  value,  D  supposing  C  to  be  the 
owner.  B  brings  an  action  to  recover  it  from  D.  B  will  recover  unless 
some  statute  changes  the  rule  of  the  common  law.  (In  a  very  few  states 
the  holding  is  for  D  without  the  aid  of  statute.)  But  D  gets  whatever 
rights  C  had,  and  by  paying  what  the  latter  still  owes  may  acquire  title, 
unless  C  has  already  by  default  forfeited  his  rights. 

9.  B  sells  and  delivers  buggies  to  C,  a  retail  dealer  in  buggies,  but 
retains  title  in  the  buggies,  and  provides  that  the  proceeds  of  sales  by  C 
shall  belong  to  B  so  far  as  necessary  to  pay  B.  C  sells  his  whole  business 
and  stock  to  D,  including  these  buggies,  and  B  brings  an  action  against 
D   to   recover  them.    It  is   held   that   B   cannot  recover  because   he  has 


Bill  of  Sale 

Unoto  all  i^en  uj>  tljcse  presents, 

That  ?•  Richard  Atkins,  of  the  city  of  Lockport,  Niagara  .County.  New  York, 

of  the  first  part,  for  and  in  consideration  of  the  sum 

often Dollars    ($19.-.°.?.rrrr.),  lawful  money  of  the  United  States, 

tor— tt?.?!6..-— rr^.in    hand  paid,  at  or  before  the  ensealing   and  delivery  of    these 

presents    by.  Jo 3 s p1?-.  PHd.?\ey. .\  .?.?.  !*?.  P.3-.1?.9. .P.^.a.°. ?.  .■ 

of  the  second  part,  the  receipt  whereof  is  hereby  acknowledged,  ha  ve  bar- 
gained   and    sold,   and  by  these   presents  do      grant   and  convey  unto   the  said 

part  y  of  the  second  part, ft.1.?..— — - executors,  administrators  and   assigns, 

the   twelfth  edition    of    Kent    s   "Commentaries   on  American  Law/     edited   by 

0.    W.    Holmes,    Jr. 

CO   I|)aue   anU   tO   I)0ttl    the  same    unto    the   said  party    of    the    second    part, 

his executors,  administrators  and  assigns  forever.      And 

do  covenant  to  and  with  the  said /><?;•/ y  of  the  second  part  that.-r- :.I.am.T-—  the 
owner  and  ha  ve  the  right  to  sell  and  transfer  the  said  property,  and  will  defend 
the  same  against  any  person  or  persons  whomsoever  claiming  the  same. 

2PU  Wlt\\C$$  WlyCVCOt,—  I—  A-ve  hereunto  set.— ;»ff.— r. 
hand  and  seal  the-— .second .-—  day  of.-T-.Ma.Y.rrr— .in  the  year  One  thou- 
sand nine  hundred  and *h.ree.\ 

3fn  presence  of  f^p@JbCUbci   (Zt£l/l/l'ob^\ 

[".] 

&tatc  of  Jfiew  gorh,  ^ 


County  of .?AMW£» 

City        0f       L?.c.kP°.r.t\ 


0n  this -..a.e.co.nd..— rr-.day  of  — — -^V.rrrrrrr.m  the  year  One  thousand  nine 

hundred  andJ^.r.6.6.. before    me,   the    subscriber,  personally   appeared 

,  Richard  Atkins  ________  to  me  personally  known  to  be  the  same 

person    described  in  and  who  executed  the  foregoing  instrument,  and    he 

acknowledged  to  me  that     he     executed  the  same. 

6  v,    '  (.  S 


r  NOTARY'S  "^ 

\   SEAL   /  Notary  Public ...for .Niagara  County, New  York. 

69 


yo  SALES  OF  GOODS  [Ch.  IV 

authorized  C  to  sell.  There  are  two  inconsistent  provisions,  — that  B  shall 
have  title,  and  that  C  shall  sell  and  give  good  title.  The  latter  must  pre- 
vail as  to  an  innocent  purchaser  from  C. 

10.  B  sells  goods  to  C,  who  gives  B  in  payment  a  bill  of  exchange  accepted 
by  X.  It  turns  out  that  the  bill  is  fictitious,  no  such  person  as  X  being  in 
existence.  C  resells  and  delivers  the  goods  to  D,  and  B  then  seeks  to 
recover  the  goods  from  D.  He  cannot  do  so.  B  has  a  right  to  rescind  the 
contract  with  C  for  fraud  and  recover  the  goods  while  in  C's  hands.  But 
he  cannot  recover  them  from  D,  who  has  purchased  in  good  faith  from  C. 

n.  B,  claiming  to  act  as  agent  for  C,  buys  goods  of  D  for  C,  and  they 
are  shipped  to  C.  B  had  no  authority  and  was  an  impostor.  When  the 
goods  arrive,  B,  claiming  to  act  for  C,  obtains  them  of  the  carrier,  and  then 
himself  sells  them  to  C  and  receives  the  price.  D  now  asks  C  to  pay  him 
and  C  refuses.  D  then  brings  an  action  to  recover  the  goods.  It  is  held 
(i)  D  sold  to  C  if  to  any  one,  not  to  B;  (2)  as  B  had  no  authority  to  act 
for  C,  and  as  C  refuses  to  ratify  B's  unauthorized  act,  there  was  a  sale  by 
D  to  no  one  ;  (3)  as  B  never  had  any  title  to  the  goods  he  could  confer 
none  on  C,  and  therefore  D  may  recover  the  goods. 

12.  B  is  induced  by  fraud  to  sell  goods  to  C,  who  then  transfers  them 
to  D  in  payment  of  a  prior  debt  owing  by  C  to  D.  B  rescinds  the  contract 
with  C  and  seeks  to  recover  the  goods  from  D.  In  New  York  B  may 
recover,  as  it  is  held  that  D  is  not  a  purchaser  for  value.  In  England  D  is 
held  to  be  a  purchaser  for  value  and  B  cannot  recover  the  goods. 

4.  For  a  money  consideration  called  the  price.  A  sale  differs 
from  a  barter  in  that  in  a  sale  the  consideration  must  be  in 
money,  while  in  a  barter  it  may  be  other  goods,  labor,  or  the 
like.  It  is  not  necessary  that  the  price  should  be  fixed  by  the 
contract.  It  is  enough  if  it  is  ascertainable,  and  it  may  be 
ascertained  by  the  ordinary  market  price,  or  left  to  some  third 
person  to  fix  or  determine. 

5.  Bill  of  sale.  A  bill  of  sale  is  a  formal  document,  corre- 
sponding to  a  deed  of  real  property,  whereby  the  seller  trans- 
fers to  the  buyer  the  title  to  specified  goods  and  (usually) 
warrants  the  title.  It  is  used  in  sales  of  any  considerable 
amount,  but  may  be  used  in  any  sale. 

46.  Statute  of  Frauds.  The  seventeenth  section  of  the  Statute 
of  Frauds  provides  that  contracts  for  the  sale  of  goods  of  the 
value  of  ;£io  ($50)  or  more  must  be  evidenced  either  (1)  by 
the  acceptance  and  receipt  of  the  goods  or  part  of  them,  or 
(2)  by  the  payment  of  some  part  of   the   purchase   price,  or 


§46]  THE  CONTRACT  7 1 

(3)  by  some  note   or  memorandum  in  writing  signed  by  the 
party  to  be  charged  or  by  his  lawful  agent  (see  sec.  22  ante). 

1.  What  are  goods?  The  English  statute  uses  the  phrase 
"goods,  wares,  or  merchandise."  Under  this  it  was  held  that 
the  sale  of  choses  in  action,  that  is,  shares  of  stock,  contract 
claims,  etc.,  need  not  comply  with  the  statute  since  they  were 
not  "  goods,  wares,  or  merchandise."  The  holding  in  the  United 
States  has  been  generally  to  the  contrary.  In  many  states  the 
statute  now  expressly  names  "choses  in  action,"  and  in  many 
the  term  "  personal  property  "  is  substituted. 

2.  Distinction  between  contract  of  sale  and  contract  for  work 
and  labor.  It  is  sometimes  difficult  to  tell  whether  a  contract 
is  one  of  sale  or  one  for  work  and  labor.  If  the  former,  it  must 
satisfy  the  statute ;  if  the  latter,  it  is  not  within  the  statute 
at  all. 

Example  1 .  A  goes  to  B's  carriage  factory  and  orders  B  to  make  a  car- 
riage according  to  a  certain  description,  for  which  A  agrees  to  pay  $250. 
When  it  is  finished  A  refuses  to  take  it  and  pleads  the  Statute  of  Frauds. 
Is  this  a  contract  of  sale?  If  so,  B  cannot  recover  against  A  because  there 
has  been  no  receipt  of  goods,  no  part  payment,  and  no  note  or  memorandum 
in  writing.  Or  is  it  a  contract  for  work  and  labor?  If  so,  B  may  recover 
against  A  because  such  a  contract  is  not  mentioned  in  the  Statute  of  Frauds 
and  is  therefore  good  however  made  or  evidenced.  There  are  three  different 
rules  that  have  been  applied  to  solve  this  problem,  (a)  The  English  rule 
is  that  if  the  contract  results  in  the  transfer  of  title  to  a  chattel  it  is  a  sale. 
Under  this  rule  the  contract  specified  is  a  sale  and  the  statute  is  a  good 
defense.  ($)  The  Massachusetts  rule  is  that  if  the  article  is  such  as  the 
vendor  in  the  ordinary  course  of  his  business  manufactures  for  the  general 
market  the  contract  is  one  of  sale  ;  but  if  made  to  a  special  order  for  a 
special  purchaser,  and  not  for  the  general  market,  the  contract  is  for  work 
and  labor.  Under  this  rule  the  contract  specified  would  be  for  work  and 
labor  and  the  statute  would  not  be  a  defense.  (V)  The  New  York  rule  is 
that  the  chattel  must  be  in  existence  when  the  contract  is  made  in  order 
that  the  contract  should  be  a  sale,  and  that  although  work  may  remain  to 
be  done  upon  it  to  adapt  it  to  the  buyer's  needs,  it  is  still  a  sale.  Under 
this  rule  the  contract  specified  would  be  for  work  and  labor,  because  the 
chattel  was  not  in  existence  when  the  contract  was  made. 

The  English  rule  looks  to  the  time  of  performance.  The  New  York  rule 
looks  to  the  time  of  the  formation  of  the  contract.  The  Massachusetts  rule 
looks  to  the  nature  of  the  contract  itself. 


72  SALES  OF  GOODS  [Ch.  IV 

3.  Distinction  between  personalty  and  realty.  It  is  also  some- 
times difficult  to  tell  whether  articles  attached  to  lands  or  build- 
ings are  personal  property  or  real  property  ;  for  example,  crops, 
trees,  ice,  fixtures,  etc.  In  general,  crops  raised  annually  by 
labor  are  treated  as  personalty,  while  trees,  perennial  crops, 
and  the  like  are  treated  as  interests  in  land.  Mineral  products 
generally  are  realty,  but  ice  has  been  held  to  be  personalty. 
If  the  article  sold  is  treated  as  realty,  then  whatever  its  value 
there  must  be  a  writing.  If  it  is  treated  as  personalty,  there 
need  be  no  formality  unless  it  is  of  the  value  of  $50,  and  then 
a  writing  may  be  dispensed  with  if  there  be  part  acceptance 
and  receipt  or  part  payment  (see  sees.  163,  164  post). 

Examples :  2.  B  sold  C  by  parol  a  growing  crop  of  five  acres  of  turnips 
for  $25,  no  present  payment.  B  gathered  the  turnips  when  ripe  and  C 
claimed  them.  B  pleads  the  Statute  of  Frauds.  The  statute  does  not  apply. 
The  turnips  while  growing,  as  well  as  when  gathered,  are  personalty,  and 
not  an  interest  in  lands.  They  are  an  annual  crop,  known  to  the  law  as 
emblements. 

3.  B  sold  a  growing  crop  of  hay  to  C  by  parol  for  $25,  with  no  payment 
down.  B  gathered  the  hay.  C  claims  it.  B  pleads  the  Statute  of  Frauds. 
Hay  is  not  an  emblement  or  annually  planted  crop.  It  is  therefore  an 
interest  in  land,  and  the  contract  is  unenforceable  for  want  of  a  memoran- 
dum under  the  fourth  section.  (But  had  the  contract  specified  that  the  title 
was  to  pass  when  the  hay  was  severed,  this  would  have  been  an  agreement 
to  sell  personalty,  for  it  contemplated  personalty  as  the  subject-matter.) 

4.  Acceptance  and  receipt.  One  way  of  satisfying  the  Statute 
of  Frauds  is  by  an  acceptance  and  receipt  of  the  goods  or  a  part 
of  them.  Both  acceptance  and  receipt  are  necessary  to  satisfy 
the  statute,  although  not  necessary  to  pass  title.1  Acceptance  is 
signifying  that  the  goods  are  in  conformity  with  the  contract. 
Receipt  is  taking  the  goods  actually  or  constructively  into  the 
custody  of  the  buyer. 

Examples  :  4.  B  buys  a  quantity  of  wheat  of  C,  who  takes  a  load  to  B's 
warehouse,  where  it  is  inspected  by  B  and  accepted.  B  afterwards  refuses  to 
take  the  rest,  and  when  sued  pleads  the  statute.  His  acceptance  and  receipt 
of  one  load  satisfies  the  statute  and  C  may  prove  the  contract  for  the  whole. 

5.  Acceptance  may  take  place  without  receipt.  Thus,  B  inspects  the 
wheat  in  C's  granary  and  expresses  his  assent  to  becoming  the  ow^er.    If 

1  Upon  the  requirements  for  passing  title,  see  sees.  47-49. 


§46]  THE  CONTRACT  73 

this  wheat  be  then  delivered  to  a  common  carrier,  as  a  railway  company, 
for  transportation  to  B  by  his  direction,  there  is  both  acceptance  and  receipt 
because  the  carrier  is  regarded  as  agent  of  the  buyer  to  receive,  although 
not  to  accept. 

5.  Part  payment.  If  one,  instead  of  accepting  and  receiving 
the  goods,  pays  any  part  of  the  purchase  money,  this  also  sat- 
isfies the  statute,  and  he  is  bound  by  the  contract.  In  a  few 
states,  among  them  New  York,  the  payment  must  be  made  at 
the  time  of  the  making  of  the  contract,  but  generally  payment 
at  any  time  is  sufficient. 

6.  The  note  or  memorandum.  There  need  not  be  a  full  and 
detailed  written  contract.  It  is  enough  if  it  contain  the  names 
of  the  parties,  the  subject-matter  of  the  sale,  and  the  agreed 
price.  It  may  be  printed  or  written,  and  may  be  in  pencil.  It 
is  best  that  both  parties  should  sign  it,  for  it  is  uncertain  which 
may  seek  to  avoid  the  performance.  But  it  is  enough  that  the 
one  who  is  sought  to  be  charged  has  signed. 

Example  6.  B  buys  of  C  20,000  feet  of  lumber  at  $10  a  thousand  feet 
B  signs  the  memorandum  but  C  does  not.  C  may  maintain  an  action 
against  B  in  case  he  refuses  to  take  the  lumber,  but  B  could  not  maintain  an 
action  against  C  in  case  he  refused  to  deliver  it.  If  both  had  signed,  then 
each  could  have  enforced  the  contract  against  the  other. 

An  authorized  agent  may  sign  for  either  party.  An  auc- 
tioneer is  the  agent  of  both  buyer  and  seller  for  the  purpose 
of  making  the  memorandum.  The  note  or  memorandum  may 
be  contained  in  two  or  more  papers  or  letters  constituting  a 
connected  series.  It  may  be  made  at  any  time,  and  need  not 
be  made  at  the  time  the  contract  is  formed.  Some  states 
require  the  memorandum  to  be  subscribed,  that  is,  signed 
underneath  the  writing. 

Form  of  Contract  of  Sale 

This  Agreement,  made  this  fifth  day  of  September,  1905,  between 
John  Doe,  of  Ithaca,   N.Y.,  and  Richard  Roe,  of  the  same  place, 

Witnesseth,  that  the  said  John  Doe,  in  consideration  of  the  agreement 
hereinafter  contained,  to  be  performed  by  the  said  Richard  Roe,  agrees  to 
sell  and  deliver  to  the  said  Richard  Roe,  at  the  farm  of  the  said  John  Doe, 
five  hundred  bushels  of  potatoes  of  good  marketable  quality,  on  the  twentieth 


74  SALES  OF  GOODS  [Ch.  IV 

day  of  October,  1905.  And  the  said  Richard  Roe,  in  consideration  thereof, 
agrees  to  pay  to  the  said  John  Doe  the  sum  of  sixty  cents  a  bushel  for  the 
said  potatoes,  immediately  upon  the  completion  of  the  delivery  thereof. 

In  Witness  Whereof,  the  said  parties  have  affixed  hereto  their  respec- 
tive signatures  the  day  and  year  first  above  written.  John  Doe. 

Richard  Roe. 

A  much  simpler  form  would  satisfy  the  Statute  of  Frauds,  which  requires 
only  a  note  or  memorandum.    For  example : 

John  Doe  has  sold  to  Richard  Roe  five  hundred  bushels  of  potatoes  at 
sixty  cents  a  bushel,  to  be  delivered  Oct.  20,  1905.  John  Doe. 

Ithaca,  N.Y.,  Sept.  5,  1905.  Richard  Roe. 

If  only  Doe  signed,  he  would  be  bound  but  Roe  would  not,  and  vice  versa. 

II.  The  Title 

47.  When  does  title  pass?  It  is  important  to  ascertain  the 
time  when  title  passes  from  the  seller  to  the  buyer.  From  that 
moment  the  risk  of  loss  is  on  the  buyer;  he  is  also  entitled  to 
any  gain  or  increase.  In  case  of  his  death  his  executor  or 
administrator  is  entitled  to  the  goods;  during  his  life  his  cred- 
itors may  attach  the  goods.  He  alone  has  the  full  power  to 
sell  them  and  give  a  good  title  to  the  buyer;  he  may  maintain 
actions  of  replevin  or  trover  in  case  of  conversion  or  unlawful 
detainer  by  the  seller  or  any  other  person.  On  the  other  hand, 
the  seller,  in  case  title  passes  to  the  buyer,  may  maintain  an 
action  for  the  price  of  the  goods  ;  whereas,  if  title  has  not 
passed,  the  seller's  action  would  be  for  damages  for  breach  of 
the  contract  to  receive  and  pay  for  the  goods. 

In  determining  the  question  as  to  when  title  passes  it  is 
necessary  to  classify  goods  into  (1)  specific  or  ascertained 
goods,  that  is,  goods  upon  which  the  minds  of  the  parties 
meet,  and  (2)  nonspecific  or  unascertained  goods,  that  is,  goods 
described  but  not  actually  chosen  or  specifically  indicated. 

Example.  (1)  B  purchases  all  the  wheat  in  C's  granary;  these  goods 
are  specific.  (2)  B  purchases  of  C  one  thousand  bushels  of  wheat  (no 
particular  wheat  indicated);  these  goods  are  unascertained.  Title  to  the 
wheat  in  the  granary  would  ordinarily  pass  to  B  as  soon  as  the  contract  is 


§4S]  THE  TITLE  75 

made,  because  delivery  is  not  necessary  to  pass  title,  while  title  to  the  one 
thousand  bushels  would  not  pass  until  the  goods  are  ascertained  and  appro- 
priated by  mutual  consent. 

48.  Specific  or  ascertained  goods.  The  general  and  particular 
rules  for  determining  when  title  passes  in  the  sale  of  specific 
goods  are  as  follows  : 

1.  General  rule.  Where  there  is  a  contract  for  the  sale  of 
specific  or  ascertained  goods,  the  property  in  the  goods  is 
transferred  to  the  buyer  at  such  time  as  the  parties  to  the 
contract  intend  it  to  be  transferred.  It  thus  appears  that 
the  intention  of  the  parties  is  the  controlling  test.  If  this 
is  expressed,  there  can  be  no  doubt.  But  it  is  not  ordinarily 
expressed,  and  the  law  has  therefore  certain  rules  for  ascer- 
taining it.  In  fixing  these  rules  the  law  looks  to  the  terms  of 
the  contract,  the  conduct  of  the  parties,  and  all  the  circum- 
stances of  the  case. 

2.  Particular  rules.  Unless  a  different  intent  appears,  the 
following  rules  are  applied  for  the  purpose  of  determining 
the  time  at  which  the  title  to  the  goods  passes  to  the  buyer. 

Rule  i.  Where  there  is  an  unconditional  contract  for  the 
sale  of  specific  goods  in  a  deliverable  state,  the  title  to  the 
goods  passes  to  the  buyer  when  the  contract  is  made,  even 
though  payment  or  delivery,  or  both,  may  be  postponed  to 
a  future  time. 

Example  1.  B  purchases  C's  carriage  for  $100  and  it  is  agreed  that  the 
carriage  shall  be  delivered  and  the  price  paid  one  week  later.  The  next 
day  the  carriage  burns  up.  B  must  pay  the  price  because  the  carriage  is 
his  under  this  rule,  as  much  so  as  if  it  had  actually  been  delivered  to  him 
and  he  had  paid  for  it.  (A  very  few  states  hold  that  a  sale  for  cash  is  con- 
ditional, and  that  the  title  does  not  pass  until  the  price  is  paid  or  payment 
waived.  But  the  better  holding  is  that  the  title  passes,  and  the  seller  may 
retain  possession  until  the  price  is  paid.) 

Rule  2.  Where  there  is  a  contract  for  the  sale  of  specific 
goods,  and  the  seller  is  bound  to  do  something  to  the  goods 
for  the  purpose  of  putting  them  into  a  deliverable  state,  the 
property  does  not  pass  until  such  thing  be  done. 


76 


SALES  OF  GOODS  [Ch.  IV 


Example  2.  B  purchases  C's  carriage  and  C  agrees  to  have  the  carriage 
painted  and  to  deliver  it  one  week  later.  The  next  day,  and  before  the  car- 
riage is  painted,  it  burns  up.  B  is  not  bound  to  pay  the  price.  The  loss 
falls  upon  C  because  the  title  does  not  pass  from  him  to  B  until  the  carriage 
is  painted.  The  loss  falls  upon  him  who  has  the  title.  After  the  carriage 
is  painted  the  title  passes  to  B  even  before  delivery.  In  England  he  must 
have  notice  that  it  is  completed,  but  not  in  the  United  States. 

Rule  3.  Where  there  is  a  contract  for  the  sale  of  goods  in 
a  deliverable  state,  but  the  seller  is  bound  to  weigh,  measure, 
test,  or  do  some  other  act  or  thing  with  reference  to  the  goods 
for  the  purpose  of  ascertaining  the  price,  the  title  does  not  pass 
until  such  act  or  thing  is  done. 

Example  3.  B  purchases  all  the  wheat  in  C's  granary  at  80  cents  a 
bushel,  and  C  agrees  to  measure  the  wheat  in  order  to  ascertain  the  sum  B 
is  to  pay.  The  title  does  not  pass  to  B  until  C  has  measured  the  wheat. 
Should  it  be  destroyed  in  the  meantime,  the  loss  would  be  Cs  and  not  B's. 
But  if  B  agrees  to  measure  the  wheat,  the  title  passes  to  him  when  the  con- 
tract is  made.  (A  few  states,  however,  hold  that  if  the  weighing  or  meas- 
uring is  solely  to  fix  the  price,  and  not  to  identify  the  goods,  the  title  passes 
at  the  time  of  the  sale.     This  is  the  New  York  rule.) 

Rule  4.  Where  goods  are  sold  and  delivered  to  the  buyer 
with  an  option  to  return  them  the  title  passes  to  the  buyer 
subject  to  be  revested  in  the  seller  by  a  return  within  the 
time  specified,  or,  if  no  time  be  specified,  within  a  reasonable 
time.  This  is  a  case  of  a  sale  upon  condition  subsequent,  that 
is,  a  right  to  return  or  resell  to  the  original  seller.  It  differs 
from  the  next  case  in  that  the  condition  there  is  a  condition 
precedent. 

Example  4.  B  purchases  C's  mowing  machine  with  the  agreement  that 
if  it  does  not  suit  him  C  will  take  it  back  at  the  price  B  paid  or  agreed  to 
pay.  This  is  a  purchase  by  B  and  a  contract  to  give  B  an  option  to  resell 
to  C.    The  title  is  in  B  until  he  exercises  this  option. 

Rule  5.  Where  goods  are  delivered  to  the  buyer  "on 
approval  "  the  title  remains  in  the  seller  until  the  buyer  sig- 
nifies his  approval.  Such  approval  may  be  signified  expressly 
or  impliedly.  If  the  buyer  retains  the  goods  beyond  the  time 
fixed,  or,  if  no  time  be  fixed,  beyond  a  reasonable  time,  he  will 
be  regarded  as  having  signified  his  approval,  and  title  will  then 


§49]  THE  TITLE  77 

vest  in  him.  The  sale  of  the  goods  by  him  would  be  an  approval. 
It  is  a  matter  of  construction  having  regard  to  all  the  terms  of 
the  contract  whether  the  transaction  is  "on  sale  or  return  "  or 
"  on  approval." 

Example  5.  B  takes  C's  mowing  machine  "on  three  days'  trial  and 
approval."    The  title  is  in  C  until  the  three  days  have  elapsed. 

Rule  6.  Where  there  is  a  sale  of  goods  in  a  deliverable  con- 
dition the  seller  may  by  the  terms  of  the  contract  reserve  the 
title  in  himself  until  the  price  is  paid.  This  right  may  be 
reserved  notwithstanding  actual  delivery  to  the  buyer. 

Examples :  6.  B  sells  C  household  goods,  retaining  title  until  the  goods 
are  paid  for.  Title,  as  security  at  least,  is  still  in  B.  It  is  often  held  that 
after  C  has  possession  the  risk  as  to  loss  falls  upon  him,  since  B's  title  is  in 
the  nature  of  a  security  for  payment  only.  It  is  also  the  law  in  many  states 
that  in  order  to  protect  himself  against  an  innocent  purchaser  of  the  same 
goods  from  C  the  seller  must  file  the  written  contract  in  some  public  office. 

7.  D  sells  goods  to  C  to  be  shipped.  D  in  shipping  the  goods  takes  the 
bill  of  lading  (freight  receipt)  in  his  own  name  or  deliverable  to  his  own 
order.  Title,  as  security  at  least,  is  still  in  D.  It  is  often  held  that  title  for 
all  other  purposes  passes  to  C,  and  that  D  merely  retains  possession  or  con- 
trol as  security  for  payment.  Such  would  be  the  case  if  title  passed  to  C  at 
the  time  of  the  sale.  But  if  the  sale  was  executory,  then  D's  conduct  showed 
an  intent  that  title  should  not  pass  until  some  future  time.  Sending  goods 
C.O.D.  (collect  on  delivery)  is  a  practical  equivalent;  the  goods  are  not  to 
be  delivered  until  paid  for. 

8.  F  sells  goods  to  G,  takes  the  bill  of  lading  in  G's  name,  attaches  it  to 
a  bill  of  exchange  (draft)  drawn  upon  G  for  the  price,  and  forwards  the 
draft  and  bill  of  lading.  G  is  bound  to  accept  or  pay  the  draft,  or  return 
the  bill  of  lading.  If  he  retains  the  bill  of  lading  without  accepting  the 
draft,  he  acquires  no  added  right  in  the  goods  thereby  ;  but  since  he  is 
intrusted  by  F  with  the  bill  of  lading,  he  could  by  a  sale  to  an  innocent 
purchaser  confer  a  good  title  as  against  F.  The  safe  course  is  to  forward 
the  bill  of  lading  and  draft  to  a  third  party,  as  a  bank,  with  instructions  to 
deliver  the  bill  of  lading  to  G  only  in  case  he  accepts  or  pays  the  draft. 

49.  Unascertained  goods.  The  following  rules  govern  the 
courts  in  determining  at  what  time  the  title  in  unascertained 
goods  passes  to  the  buyer  under  a  contract  of  sale. 

Rule  i.  Where  there  is  a  contract  for  the  sale  of  described 
but  unascertained  goods  no  property  in  the  goods  is  transferred 


yS  SALES  OF  GOODS  [Ch.  IV 

to  the  buyer  until  the   described   goods   are   ascertained   and 
appropriated  to  the  contract  with  the  consent  of  both  parties. 

Exceptions :  (a)  There  may  be  a  contract  of  sale  of  an  undivided 
share  of  specific  goods,  in  which  case  the  buyer  becomes  a  tenant  in  com- 
mon with  the  seller  or  owner  of  the  remaining  undivided  portion.  For 
example,  B  purchases  one  half  the  wheat  in  C's  granary.  Title  to  an  undi- 
vided half  of  the  wheat  passes  at  once  to  B.  (d)  There  may  be  a  sale  of 
a  definite  measure  to  be  taken  out  of  a  definite  mass  of  indefinite  measure. 
This  case  differs  from  the  first  in  that  the  sale  is  not  of  an  aliquot  portion, 
as  one  half,  but  of  a  definite  weight  or  measure  out  of  a  specific  mass  of 
unknown  weight  or  measure;  as  6000  bushels  of  wheat  out  of  all  the  wheat 
in  a  bin,  the  total  in  the  bin  being  unknown.  The  buyer  becomes  owner  of 
that  undivided  portion  represented  by  the  ratio  of  6000  to  the  total  ;  if  the 
total  be  9000,  then  the  buyer  may  take  title  to  an  undivided  two  thirds  from 
the  time  of  the  making  of  the  contract.  Two  remarks  are  to  be  made 
upon  this  exception.  First,  it  applies  only  to  what  are  called  fungible  goods, 
that  is,  goods  like  wheat,  coal,  and  the  like,  which  do  not  have  to  be  dealt 
with  in  specie  but  by  weight  or  measure,  and  not  to  goods  having  individual 
characteristics  like  horses.  Second,  even  as  to  fungible  goods  the  exception 
has  not  been  everywhere  accepted,  many  jurisdictions  insisting  that  title 
cannot  pass  in  such  cases  until  the  6000  bushels  have  been  separated  from 
the  mass. 

Rule  2.  Where  there  is  a  contract  for  the  sale  of  unascer- 
tained goods  by  description,  and  goods  of  that  description  and 
in  a  deliverable  state  are  unconditionally  appropriated  to  the 
contract,  either  by  the  seller  with  the  assent  of  the  buyer  or 
by  the  buyer  with  the  assent  of  the  seller,  the  property  in  the 
goods  passes  to  the  buyer  at  the  time  of  such  appropriation. 
Such  assent  may  be  expressed  or  implied  and  may  be  given 
either  before  or  after  the  appropriation  is  made.  The  appro- 
priation must  be  final  and  unconditional.  If  the  seller  may 
substitute  other  goods,   it   is  not  final. 

Examples :  1 .  B  orders  of  C  6000  bushels  of  wheat  of  a  specific  descrip- 
tion, the  same  to  be  measured  into  a  freight  car  on  the  siding  at  C's  ware- 
house. C  measures  6000  bushels  of  the  specified  description  into  the  car. 
The  title  passes  to  B  as  soon  as  the  appropriation  is  thus  completed. 

2.  B  buys  goods  of  C  from  sample.  C  sets  aside  in  his  store  goods  cor- 
responding with  the  sample  and  marks  them  with  B's  name.  The  goods 
are  burned  and  C  sues  B  for  the  price.    If  the  appropriation  was  made  by 


§50]  THE  TITLE  79 

C  with  B's  consent,  the  title  passed  and  B  is  liable.  But  if  the  appropria- 
tion was  not  final,  —  if  B  had  not  consented  to  this  form  of  appropriation, — 
the  title  was  still  in  C  and  B  is  not  liable.  This  involves  questions  of  fact 
to  be  determined  in  each  case. 

Rule  3.  An  unconditional  delivery  of  the  goods  to  a  carrier, 
as  directed  by  the  buyer,  or  as  warranted  by  custom  and  usage, 
is  always  deemed  a  sufficient  appropriation  to  transfer  the 
title  to  the  buyer;  but  a  delivery  by  which  a  bill  of  lading  is 
made  to  the  order  of  the  seller,  or  is  retained  by  the  seller,  or 
is  attached  to  a  bill  of  exchange  drawn  upon  the  buyer,  may 
not  pass  title.    This  is  explained  in  Rule  6,  sec.  48. 

Exa)nple  3.  B  orders  of  C  6000  bushels  of  wheat  of  a  specified  descrip- 
tion. C  delivers  to  a  railway  carrier  6000  bushels  of  wheat  of  this  descrip- 
tion billed  to  B,  and  sends  B  the  bill  of  lading.  The  title  passes  to  B  as 
soon  as  the  delivery  to  the  carrier  is  complete.  But  if  the  bill  of  lading 
reads  "  deliverable  to  the  order  of  C,"  the  title  will  not  pass,  because  C  has 
thus  reserved  it  in  himself.  Moreover,  if  the  contract  requires  the  seller  to 
deliver  the  goods  to  the  buyer  at  a  particular  place,  the  property  will  not 
pass  until  the  goods  have  reached  the  place  agreed  upon.  Thus,  B  orders 
of  C  the  wheat  as  above,  "  to  be  delivered  free  of  charge  at  my  warehouse 
in  the  city  of  X."  The  title  does  not  pass  until  the  wheat  is  in  the  specified 
warehouse. 

50.  Who  has  the  risk  ?  Unless  otherwise  agreed,  the  goods 
remain  at  the  seller's  risk  until  the  title  passes  to  the  buyer. 
As  soon  as  the  title  passes  to  the  buyer  the  goods  are  at  the 
buyer's  risk,  whether  he  actually  has  possession  or  not.  Risk 
follows  title,  is  the  rule  that  prevails  unless  the  parties  stipulate 
to  the  contrary.  In  determining  who  has  the  title  the  rules  given 
above  are  to  be  applied  in  the  absence  of  an  express  stipulation. 

Exception.  If  the  seller  delivers  the  goods  to  the  buyer,  but  by  the  terms 
of  the  sale  retains  title  as  security  for  the  purchase  price,  the  goods  are 
at  the  risk  of  the  buyer.  For  example,  B  purchases  household  goods  of 
C  upon  installment  payments,  and  it  is  agreed  that  the  title  to  the  goods 
shall  remain  in  C  until  they  are  actually  paid  for.  B  has  the  goods  in  his 
house,  where  they  are  accidentally  destroyed  by  fire.  B  must  pay  for  the 
goods;  the  risk  is  with  him,  although  for  security  the  title  is  with  C.  It  is 
the  same  as  if  title  had  passed  to  B  and  he  had  then  given  C  a  chattel 
mortgage  on  the  goods  as  security. 


80  SALES  OF  GOODS  [Ch.  IV 

He  who  has  title  also  has  the  right  to  any  gain  or  increase 
derived  from  the  article.  He  who  bears  the  risk  and  burden  is 
also  entitled  to  the  benefits. 

Example.  C  purchases  B's  flock  of  sheep  and  leaves  them  in  B's  pos- 
session, delivery  and  payment  to  be  later.  B  shears  the  wool.  C  sues  B 
for  its  value.  C  may  recover.  The  title  passed  to  him  and  the  wool  is  his. 
So  if  lambs  are  born  of  these  sheep  they  belong  to  C.  On  the  other  hand, 
if  any  of  the  sheep  die  the  loss  falls  on  C. 


III.   Performance 

51.  Duties  of  the  seller.  The  duties  of  the  seller  in  perform- 
ance of  his  contract  may  be  briefly  enumerated  as  follows. 

i.  It  is  the  duty  of  the  seller  to  deliver  the  goods  in  accord- 
ance with  the  terms  of  the  contract.  Whether  he  is  to  send 
them  or  the  buyer  is  to  call  for  them  will  depend  upon  the 
contract.  If  nothing  appears  in  this  respect,  the  place  of 
delivery  is  ordinarily  the  seller's  place  of  business  or  residence 
or  the  place  where  the  goods  are  at  the  time  of  the  sale.  If 
no  time  is  fixed,   a  reasonable  time  is  understood. 

2.  It  is  the  duty  of  the  seller  to  deliver  the  quantity  speci- 
fied. If  he  delivers  less,  the  buyer  may  reject  them.  If  he 
delivers  more,  the  buyer  may  take  what  he  contracted  for  and 
reject  the  rest,  or  he  may  reject  the  whole.  The  buyer  is  not 
bound  to  accept  delivery  in  installments,  unless  he  has  agreed 
to  do  so. 

3.  It  is  the  duty  of  the  seller  to  deliver  the  quality  specified. 
The  buyer  must  be  allowed  a  reasonable  opportunity  to  inspect 
the  goods,  if  he  did  not  inspect  them  when  he  purchased 
them,  and  he  is  not  deemed  to  have  accepted  them  until  he 
has  had  such  opportunity  of  examining  them  in  order  to  see  if 
they  conform  to  the  contract.  He  is  deemed  to  have  accepted 
them  when  he  intimates  that  fact  to  the  seller,  or  exercises 
ownership  over  them,  or  retains  them  without  dissent  after  the 
lapse  of  a  reasonable  time.  If  the  buyer  rightfully  rejects  the 
goods,  he  is  not  bound  to  return  them  to  the  seller,  but  must 
permit  the  seller  to  take  them. 


§§  52,53]  WAR  RAMIES  8 1 

4.  It  is  the  duty  of  the  seller  to  confer  upon  the  buyer  a 
good  title  to  the  goods. 

5.  It  is  the  duty  of  the  seller  to  make  good  all  representa- 
tions and  warranties  expressed  or  implied  in  the  contract  of 
sale.    This   is  more  fully   explained   under  Warranties,  post. 

52.  Duties  of  the  buyer.  The  duties  of  the  buyer,  after  a 
contract  of  sale  and  purchase  is  made,  are  as  follows. 

1.  It  is  the  duty  of  the  buyer  to  accept  the  goods.  If  he 
refuses  to  do  so,  the  seller  may  sue  for  the  price  if  title  has 
passed  to  the  buyer,  or  for  damages  if  title  has  not  passed. 

2.  It  is  the  duty  of  the  buyer  to  pay  for  the  goods.  Unless 
otherwise  agreed,  delivery  of  the  goods  and  payment  of  the 
price  are  concurrent  conditions.  If  the  price  is  agreed  upon, 
that  must  be  paid.  If  no  price  is  agreed  upon,  a  reasonable 
price,  namely  the  market  price,   is  understood. 

IV.  Warranties 

53.  Definition  and  classification.  A  warranty  is  a  contract  of 
indemnity  made  by  a  seller  of  goods  in  favor  of  the  buyer,  to 
protect  the  latter  against  the  failure  of  one  or  more  terms  of 
the  contract  of  sale. 

A  true  warranty,  that  is,  an  express  warranty,  is  collateral  to 
the  main  contract  of  sale.  Warranties  that  are  a  term  in  the 
main  contract  are  really  conditions.  The  latter,  however,  are 
often  classed  with  implied  warranties  and  are  treated  under  the 
general  head  of  warranties. 

A  warranty  may  be  either  express  or  implied. 

An  express  warranty  is  a  promise  or  affirmation  by  the  seller 
of  a  material  fact  concerning  the  goods  which  has  a  natural 
tendency  to  induce  the  buyer  to  purchase  them. 

An  implied  warranty  (or  condition)  is  one  which  arises  from 
the  acts  and  conduct  of  the  parties,  or  from  custom  or  usage, 
or  by  operation  of  law. 

Examples :  1 .  B  buys  goods  of  C,  who  assures  B  (that  is,  warrants)  that 
they  have  fast  colors.  This  is  an  express  warranty.  It  is  not  necessary 
to  use  the  word  "warrant"  or  '-warranty."  If  the  colors  run,  there  is  a 
breach  of  the  warranty. 


82  SALES  OF  GOODS  [Ch.  IV 

2.  It  turns  out  that  C  did  not  own  the  goods.  There  is  a  breach  of  the 
implied  warranty  of  title  which  accompanies  every  sale. 

3.  D  orders  of  E  a  quantity  of  goods  by  sample.  There  is  an  implied 
warranty  (or  condition)  that  the  goods  when  received  shall  correspond  with 
the  sample. 

54.  Express  warranties.  The  express  warranty  is  gathered 
from  the  terms  of  the  contract.  If  the  contract  be  in  writing 
and  unambiguous,  the  construction  is  for  the  court.  If  the 
contract  be  by  parol,  the  construction,  unless  too  clear  for 
any  difference  of  opinion,  is  for  the  jury.  If  the  contract  is  in 
writing,  an  oral  express  warranty  cannot,  save  in  very  excep- 
tional cases,  be  added  to  it.  If  the  seller  first  makes  statements 
amounting  to  warranties,  and  then  declares  he  will  not  war- 
rant, there  is  no  warranty.  But  his  unexpressed  intention  not 
to  warrant  will  not  avail  him  if  he  uses  apt  words.  It  is  not 
his  intention  but  the  impression  reasonably  produced  upon  the 
mind  of  the  buyer  by  his  words  or  conduct  that  is  the  test. 

The  presence  of  an  express  warranty  will  not  exclude  an 
implied  warranty  unless  the  express  warranty  be  inconsistent 
with  it. 

General  warranties  of  "  soundness  "  and  the  like  will  not 
ordinarily  cover  specific  defects  obvious  to  the  buyer;  but 
they  will  cover  defects  about  which  a  buyer  expresses  doubt 
after  an  examination.  A  particular  warranty  will  cover  a  par- 
ticular defect  if  intended  to  do  so,  although  the  defect  may 
be  patent. 

Expressions  of  opinion  or  "puffs"  do  not  amount  to  war- 
ranties. 

Exa,7>t files :  1.  B  in  selling  a  horse  says,  "  This  horse  is  sound."  There 
is  visible  a  large  bunch  upon  the  horse's  leg.  The  warranty  does  not  cover 
this  defect,  although  it  does  cover  other  defects  not  obvious. 

2.  A  buyer  in  looking  at  sheep  thinks  he  has  discovered  foot  rot.  The 
seller  assures  him  that  he  is  mistaken  and  warrants  the  sheep  to  be  sound. 
The  general  warranty  covers  foot  rot. 

3.  "  These  sheep  will  shear  from  six  to  ten  pounds  of  wool  a  head,  and 
you  can  pay  for  the  sheep  in  two  years  from  the  wool,"  is  a  mere  statement 
of  opinion  or  "  puff,"  and  the  buyer  should  not  rely  upon  it.  So  also  the 
statement  "  This  is  an  A  No.  1  bond." 


§55]  WARRANTIES  8$ 

55.  Implied  warranties.  The  following  are  the  principal 
implied  warranties  that  are  attached  to  a  contract  of  sale. 

i.  Warranty  of  title.  There  is  an  implied  warranty  by  the 
seller  that  he  has  a  right  to  sell  the  goods,  that  the  buyer  shall 
have  and  enjoy  quiet  possession  of  them,  and  that  they  shall 
be  free  from  any  charge  or  incumbrance  in  favor  of  any  third 
person  ;  or  in  other  words,  a  warranty  of  title.  If  this  warranty 
is  broken  and  the  buyer  deprived  of  the  goods,  he  may  recover 
the  purchase  price  paid,  with  interest. 

Exceptions.  This  does  not  attach,  however,  to  a  sale  made  by  a  sheriff 
or  other  person  who  sells  under  authority  of  law,  nor,  in  general,  to  a  sale 
in  which  the  seller  undertakes  to  transfer  only  such  property  as  he  or  the 
person  he  represents  may  have  in  the  goods;  as,  for  example,  a  sale  by  an 
assignee  in  bankruptcy,  an  administrator  or  executor,  a  trustee,  or  a  mort- 
gagee under  a  power  of  sale.  But  it  does  attach  to  the  ordinary  sales  in  the 
business  world. 

2.  Sale  by  description,  (a)  In  the  sale  of  goods  by  descrip- 
tion there  is  an  implied  warranty  that  the  goods  shall  correspond 
with  the  description,  (b)  If  the  goods  are  bought  by  descrip- 
tion from  a  seller  who  deals  in  goods  of  that  description,  there 
is  an  implied  warranty  that  the  goods  shall  be  of  merchantable 
quality. 

Examples:  I.  B  orders  of  C  "early  strap-leaf  red-top  turnip  seed"  for 
raising  turnips  for  the  market.  C  furnishes  seed  which  B  plants.  The  crop 
is  late  and  fit  only  for  cattle.  No  inspection  of  the  seed  by  B  could  reveal 
that  they  did  not  correspond  with  the  description.  B  has  an  action  against 
C  for  breach  of  the  implied  warranty  that  the  seed  should  correspond  with 
the  description.  It  is  immaterial  that  C  believed  that  the  seed  were  of  the 
kind  ordered.  B  may  recover  as  damages  the  difference  between  the  mar- 
ket value  of  the  crop  raised  and  the  market  value  of  the  one  he  would  have 
raised  had  the  seed  he  ordered  been  furnished. 

2.  B  orders  ice  of  C  to  be  shipped  from  Maine  to  Boston.  There  is  an 
implied  warranty  that  the  ice  shall  be  of  merchantable  quality.  But  if  B 
has  examined  the  ice  before  shipment,  there  is  no  implied  warranty  as  to 
any  defect  which  such  examination  ought  to  have  revealed. 

3.  Sale  by  sample.  In  a  sale  by  sample  there  is  an  implied 
warranty  (a)  that  the  bulk  shall  correspond  with  the  sample  in 
quality,  and  (b)  that  the  goods  shall  be  free  from  any  defect 


g4  SALES  OF  GOODS  [Ch.  IV 

rendering  them  unmerchantable  which  would  not  be  apparent 
on  reasonable  examination  of  the  sample. 

Example  3.  B  ordered  of  C  certain  "corkscrew  worsted  coatings"  to 
correspond  in  weight  and  quality  with  samples  supplied  B.  The  cloth  when 
made  up  into  coats  gave  way  at  the  seams,  owing  to  some  defect  in  the 
manufacture.  The  bulk  corresponded  with  the  sample,  so  there  was  no 
breach  of  that  warranty.  But  it  was  unfit  for  the  purpose  to  which  such 
material  is  ordinarily  put,  and  this  was  a  breach  of  the  warranty  of  mer- 
chantability. B  could  not  reasonably  discover  this  defect  from  the  sample, 
nor,  indeed,  from  the  bulk  until  the  cloth  was  actually  made  up  into 
garments. 

The  buyer  must  be  given  a  reasonable  opportunity  to  com- 
pare the  bulk  with  the  sample,  and  in  sales  by  description  he 
must  have  reasonable  opportunity  for  inspection. 

There  may  be  in  the  same  sale  an  implied  warranty  as  to 
description  and  also  as  to  sample.  Such  was  the  case  in  the 
example  last  given.  The  goods  were  to  be  "  corkscrew  worsted 
coatings  "  and  were  also  to  correspond  with  the  sample. 

4.  Fitness  for  particular  purpose.  Where  the  buyer  makes 
known  to  the  seller,  who  is  the  grower  or  the  manufacturer  of 
the  goods,  the  particular  purpose  for  which  such  goods  are 
required,  relying  upon  the  seller's  skill  or  judgment,  there  is 
an  implied  warranty  that  the  goods  shall  be  reasonably  fit  for 
such  purpose.  In  England  and  in  some  of  our  states  the  implied 
warranty  of  fitness  extends  to  sales  by  dealers  who  do  not 
grow  or  manufacture  the  article;  but  generally  in  this  country 
it  is  confined  to  growers,  producers,  or  manufacturers. 

Examples:  4.  B  orders  of  C,  a  carriage  maker  and  repairer,  a  new  pole 
for  his  carriage.  The  pole  breaks,  owing  to  a  defect,  and  the  carriage  is 
damaged.  C  is  liable  to  B  for  the  damages.  There  is  a  breach  of  the 
implied  warranty  that  the  pole  shall  be  reasonably  fit  for  the  purpose. 

5.  B  orders  of  C,  a  manufacturer  of  cloths,  a  quantity  of  "  indigo  blue 
cloth."  B  is  a  woolen  merchant,  but  is  not  known  to  C  to  be  a  tailor, 
B  makes  the  cloth  up  into  liveries,  and  the  cloth  soon  shows  defects.  There 
was  no  implied  warranty  that  the  cloth  was  fit  for  that  purpose,  because 
the  purpose  was  unknown  to  the  seller.  There  might  be  a  breach  of  the 
implied  warranty  of  merchantability,  but  this  would  depend  upon  other  cir- 
cumstances. Had  the  order  been  "  indigo  blue  cloth  suitable  for  liveries," 
there  would  have  been  an  implied  warranty  of  fitness. 


§  56]  WARRANTIES  85 

6  (Exception).  A  sale  of  a  specified  article  under  its  patent  or  other 
trade  name  does  not  carry  an  implied  warranty  for  any  particular  purpose. 
An  order  for  "your  Challenge  auger  outfit  for  boring  wells"  is  fully  com- 
plied with  when  the  "Challenge  auger  outfit"  is  furnished.  The  contract 
assumes  that  the  buyer  knows  what  are  the  character  and  capacities  of  this 
article. 

5.  Sale  of  provisions.  The  above  rules  apply  to  the  sale  of 
provisions.  But  in  a  few  jurisdictions  there  is  an  additional 
implied  warranty  in  the  sale  of  provisions  for  human  consump- 
tion, namely,  that  they  are  wholesome  and  fit  for  food.  This 
is  put  on  the  ground  of  the  preservation  of  health  and  life,  and 
is  applied  even  where  the  buyer  sees  and  inspects  the  article 
before  purchasing.  Most  courts  recognizing  this  warranty  at 
all  limit  it  to  the  case  where  the  buyer  intends  to  consume  the 
article  and  the  seller  knows  this  fact ;  but  some  extend  it  even 
to  the  case  of  a  sale  by  a  wholesaler  to  a  retailer  who  intends 
to  resell  the  article.  In  no  case  is  the  doctrine  applied  to  the 
sale  of  food  for  animals. 

Example  7.  A  sells  meat  to  B,  a  retailer,  who  resells  it  to  C  for  domestic 
use.  Many  courts  hold  that  there  is  no  implied  warranty  by  either  A  or  B 
that  it  is  wholesome.  Some  hold  there  is  an  implied  warranty  of  wholesome- 
ness  by  B  but  not  by  A.  It  is  rarely  held  that  there  is  such  a  warranty 
by  A.  If  either  A  or  B  knew  the  meat  was  unwholesome,  he  would  be 
liable  in  deceit  for  fraudulent  concealment. 

56.  The  rule  of  caveat  emptor.  The  general  rule  in  the  law 
of  sales  is  that  of  caveat  emptor — let  the  buyer  beware.  This 
is  supposed  to  have  the  effect  of  making  men  self-reliant  and 
cautious,  and  of  decreasing  litigation. 

The  exceptions  to  the  rule  are  those  enumerated  under  the 
head  of  implied  warranties.  In  those  cases  the  seller  assumes 
the  risk  instead  of  the  buyer,  and  without  any  express  stipula- 
tion. In  all  other  cases,  if  the  buyer  does  not  wish  to  assume 
the  risk,  he  should  exact  an  express  warranty.  In  the  sale  of 
specific  chattels  examined  by  the  buyer  there  is  usually  no 
implied  warranty  except  as  to  title.  But  if  the  character  of  the 
article  cannot  be  ascertained  by  examination  (as  in  the  case  of 
seeds)  there  is  an  implied  warranty  that  the  article  shall  pos- 
sess the  necessary  characteristics  of  such  articles. 


86  SALES  OF  GOODS  [Ch.  IV 

57.  Remedies  for  breach  of  warranty.  In  discussing  the  reme- 
dies for  breach  of  warranty  it  is  necessary  to  distinguish  between 
express  warranties  and  implied  warranties. 

I.  Express  warranties.  In  England  and  in  New  York  and 
many  of  our  other  states  a  buyer  to  whom  title  has  passed 
cannot  rescind  the  sale  for  breach  of  an  express  warranty.  He 
is  confined  to  an  action  for  damages  for  the  breach.  In  Mas- 
sachusetts and  some  other  states  he  may  either  rescind  the 
sale,  that  is,  return  the  goods  and  recover  the  price,  or  he 
may  keep  the  goods  and  sue  for  the  breach  of  the  warranty. 
This  conflict  of  authority  concerning  the  right  to  rescind  the 
sale  for  breach  of  an  express  warranty  is  very  sharp  and  can 
be  settled  only  by  some  uniform  statute  adopted  by  the  states. 
The  reason  given  for  denying  the  right  is  that  the  contract 
of  warranty  is  collateral  to  the  main  contract  of  sale,  and  its 
breach  should  not  affect  that  contract.  If,  however,  the  war- 
ranty is  fraudulent,  that  is,  if  the  seller  knew  it  was  false,  the 
contract  may  be  afterwards  rescinded  for  the  fraud. 

If  the  title  has  not  passed  to  the  buyer,  he  may  refuse  to 
receive  the  goods  upon  discovering  a  breach  of  the  express 
warranty. 

Examples:  i.  B  sells  and  delivers  timber  to  C  and  innocently  warrants 
it  to  be  sound.  C  discovers  the  timber  is  unsound,  offers  to  return  it, 
and  demands  back  the  purchase  money.  He  then  sues  for  the  purchase 
money.  In  New  York  he  will  fail;  he  can  recover  only  the  difference  in 
value  between  the  timber  as  warranted  and  as  it  was  in  fact.  In  Massachu- 
setts he  will  succeed,  upon  returning  the  timber,  in  recovering  the  whole 
purchase  money. 

2.  B  knows  the  timber  is  unsound  and  makes  the  warranty.  This  is 
fraud  and  B  may  rescind  and  recover  the  whole  purchase  price. 

3.  E  sells  F  a  buggy  which  he  innocently  warrants  to  be  new  and  sound, 
and  agrees  to  repaint  the  wheels.  F  discovers  the  buggy  to  be  an  old  one 
and  unsound.  F  may  refuse  to  receive  it  because  the  title  has  not  yet  passed 
to  him. 

2.  Implied  warranties.  For  the  breach  of  an  implied  war- 
ranty the  buyer  may  at  his  election  either  (a)  rescind  the 
sale  and  recover  the  price  or  {b)  receive  and  keep  the  goods 
and  sue  for  damages  for  the  breach,  or,  in  case  the  price  is 


§58]  REMEDIES  87 

unpaid,  set  up  these  damages  to  diminish  the  price.  In  order 
to  rescind,  the  buyer  must  act  promptly  or  within  a  reasonable 
time.  If  the  seller  refuses  to  receive  the  goods  upon  a  rescis- 
sion, the  buyer  may  hold  them  as  bailee  for  the  seller. 

Examples:  4.  B  orders  goods  of  C  by  description.  When  the  goods 
arrive  B  discovers  that  they  do  not  answer  the  description.  He  may  reject 
them,  or  (except  in  New  York)  he  may  take  them  and  sue  for  damages  if 
he  has  paid  the  price,  or  deduct  the  damages  from  the  price  if  it  is  yet 
unpaid.  [In  New  York,  upon  a  sale  by  description  where  the  quality  is  dis- 
coverable by  inspection,  an  acceptance  by  the  buyer  after  such  inspection 
deprives  him  of  any  remedy  against  the  seller  for  breach  of  warranty.  His 
only  remedy  is  to  reject  the  goods.  Acceptance  is  treated  as  an  admission 
that  the  goods  do  correspond  with  the  description.  This  rule  is  peculiar  and 
local.] 

5.  (a)  B  orders  of  C  a  machine  for  a  particular  purpose.  B  sets  it  up 
and  finds  it  unfit  for  the  purpose.  B  may  reject  it  if  he  acts  with  prompt- 
ness after  such  test,  or  he  may  keep  it  and  sue  for  damages  for  breach  of 
the  implied  warranty,  (b)  So  if  B  orders  a  chemical  he  may  use  enough  of 
it  to  determine  whether  it  answers  the  description,  and,  if  it  does  not,  he 
may  reject  the  remainder  without  being  required  to  pay  for  what  he  has 
reasonably  used  in  the  test.  (V)  But  if  he  can  determine  the  quality  with- 
out using  any,  he  waives  his  right  to  reject  the  bulk  by  consuming  any 
portion  of  it. 

6.  The  damages  recoverable  upon  a  breach  are  all  the  losses  directly  and 
naturally  resulting  from  it.  B  orders  from  the  maker,  C,  a  refrigerator  suit- 
able for  keeping  dressed  poultry.  The  refrigerator  furnished  by  C  is  not 
suitable  for  the  purpose  and  the  poultry  spoil.  B's  damages  include  the 
difference  between  the  value  of  the  refrigerator  ordered  and  the  one  deliv- 
ered, and  also  the  loss  incurred  by  the  spoiling  of  the  contents.  See  also 
the  case  of  the  sale  of  the  turnip  seed,  p.  83  ante. 


V.  Remedies 

58.  Rights  of  unpaid  seller  against  the  goods.  Although  the 
title  to  the  goods  may  have  passed  to  the  buyer,  the  unpaid 
seller  is  entitled  to  the  following  rights. 

(1)  If  the  seller  is  still  in  possession  of  the  goods,  he  has  a 
lien  on  them  or  a  right  to  retain  them  until  the  price  is  paid, 
unless  he  has  sold  on  credit  and  the  term  of  credit  has  not 
expired. 


88  SALES  OF  GOODS  [Ch.  IV 

(2)  If  the  seller  has  shipped  the  goods  and  he  afterwards 
learns  of  the  insolvency  of  the  buyer,  he  has  the  right  to  stop 
the  goods  in  transitu  before  they  reach  the  buyer  and  thus 
regain  possession  of  them. 

(3)  If  the  seller  has  a  lien  or  has  stopped  the  goods  in  tran- 
situ, as  above,  (a)  he  may  resell  the  goods  in  case  the  buyer 
delays  an  unreasonable  time  to  pay  for  them,  or  at  once  if  the 
goods  are  perishable,  and  if  they  sell  for  less  than  the  buyer 
agreed  to  pay,  may  recover  from  him  as  damages  the  difference  ; 
or  (b)  he  may  rescind  the  sale  and  transfer  of  title,  and  may 
resume  the  title  himself  in  case  the  buyer  delays  an  unreason- 
able time  to  pay  the  price,  and  may  also  recover  from  the 
buyer  as  damages  any  loss  occasioned  by  the  buyer's  default. 

Sellers  lien.  The  seller's  lien  exists  when  he  has  sold  for 
cash  down  ;  or  when,  having  sold  on  credit,  the  term  of  credit 
has  expired  before  delivery ;  or  when,  having  sold  on  credit,  the 
buyer  becomes  insolvent  before  delivery.  He  loses  his  lien  by 
delivery  to  the  buyer  or  his  agent,  or  by  delivery  to  a  carrier 
without  reserving  in  the  bill  of  lading  the  right  to  possession, 
or  by  a  waiver  of  the  lien.  He  cannot  hold  the  goods  for  any 
claim  except  the  purchase  price,  nor  after  valid  tender  of  the 
purchase  price. 

Stoppage  in  transitu.  Goods  are  in  transit  after  delivery  to  a 
carrier  and  before  delivery  to  the  buyer,  and  may  be  stopped 
by  the  unpaid  seller  in  case  the  buyer  becomes  insolvent. 
The  transit  ends,  however,  if  the  carrier  consents,  after  the 
arrival  of  the  goods  at  their  destination,  to  hold  them  for  the 
buyer,  or  if  the  carrier  wrongfully  refuses  to  deliver  them  to 
the  buyer  upon  demand.  The  unpaid  seller  exercises  his  right 
of  stoppage  in  transitu  by  giving  reasonable  notice  to  the  car- 
rier.1 It  is  then  the  duty  of  the  carrier  to  redeliver  the  goods  to 
the  seller,  and  the  duty  of  the  seller  to  pay  the  transportation 

1  To  the  X.Y.  Railroad  Co. :  Circumstances  having  arisen  which  give  to  me 
the  right  of  stoppage  in  transitu,  I  hereby  direct  you  to  hold,  subject  to  my  orders, 
the  goods  delivered  to  you  on  Dec.  31,  1904,  at  Ithaca,  N.Y.,  and  consigned  to 
John  Doe,  Buffalo,  N.Y.,  and  not  to  deliver  the  same  to  the  consignee. 

Ithaca,  N.Y.,  Jan.  5,  1905.  Richard  Roe. 


§  5s]  REMEDIES  89 

charges.  But  if  the  carrier  has  issued  a  negotiable  bill  of  lad- 
ing, this  must  be  surrendered  or  a  sufficient  bond  be  given 
to  protect  the  carrier  from  any  claim  arising  under  it.  If, 
however,  such  negotiable  document  of  title  has  actually  been 
transferred  by  way  of  sale  to  an  innocent  purchaser  for  value 
while  the  goods  are  in  the  hands  of  the  carrier,  and  before 
the  seller's  right  has  been  exercised,  his  right  of  stoppage 
in  transitu  is  ended.  But  a  sale  of  the  goods  by  the  buyer, 
where  there  is  no  such  documentary  title,  will  not  defeat  the 
seller's  right. 

Resale.  The  seller's  right  of  resale  is  exercised  as  agent  by 
operation  of  law  for  the  buyer.  The  purchaser  at  the  resale 
gets  a  title  good  against  the  original  buyer.  Notice  of  the 
intention  to  resell  need  not  necessarily  be  given  to  the  buyer, 
but  it  is  always  safer  to  give  it.  Notice  of  the  actual  time  and 
place  of  the  resale  need  never  be  given. 

Reseissioji.  Notice  of  rescission  of  the  contract  and  retrans- 
fer  of  title  to  the  seller  is  not  absolutely  essential  but  is  highly 
desirable.  Some  overt  act  showing  an  intention  to  rescind, 
as,  for  example,  the  consumption  of  the  goods  by  the  seller,  is 
essential. 

Examples:  1.  B  sold  lumber  to  C  and  took  C's  note  for  thirty  days.  The 
lumber  remained  in  B's  possession.  C  sold  the  lumber  to  D.  When  D 
came  for  it,  B  refused  to  deliver  it  because  C  had  become  insolvent.  B  has 
asserted  a  valid  right.  Although  a  sale  on  credit  waives  a  lien,  the  lien 
revives  if  the  buyer  becomes  insolvent.  D  got  no  better  right  than  his 
vendor  (C)  had. 

2.  B  sold  tobacco  to  C,  who  then,  unknown  to  B,  was  insolvent. 
B  consigned  the  tobacco  to  C  and  sent  C  a  bill  of  lading.  C  failed  and  trans- 
ferred the  bill  of  lading  to  D,  his  assignee  in  bankruptcy.  B  then  stopped 
the  goods  in  the  carrier's  hands.  D  claims  them.  In  this  case  B  will 
get  the  goods.  An  assignee  in  bankruptcy  is  not  a  purchaser  for  value,  as 
he  parts  with  nothing.  But  if  C  or  D  had  sold  and  delivered  the  bill  of 
lading  to  E  before  B  stopped  the  goods,  B's  right  would  have  been  gone. 

3.  B  sold  C  a  diamond  for  cash.  C  would  not  pay  cash  on  delivery  and 
B  retained  the  diamond.  Afterwards  B  sold  it  to  D  for  $40  less  than  C  had 
agreed  to  give.  B  may  recover  this  $40  of  C,  provided  he  sold  in  good  faith 
according  to  usage  and  for  the  highest  price  obtainable. 

4.  In  the  above  case  B  sold  the  diamond  for  $30  more  than  C  had  agreed 
to  give.    C  claims  this  $30.    (a)  If  B  sold  as  agent  of  C,  he  should  account 


90  SALES  OF  GOODS  [Ch.  IV 

to  C  for  the  profits.  (t>)  If  B  rescinded  the  contract,  the  diamond  became 
his  and  he  is  entitled  to  the  enhanced  price  ;  but  of  course  he  has  now 
suffered  no  damage  for  which  he  can  sue  C. 

59.  Rights  of  unpaid  seller  by  way  of  action  for  breach  of  con- 
tract. The  unpaid  seller  has  the  following  remedies  against  the 
delinquent  buyer. 

i .  Action  for  the  price.  If  the  property  in  the  goods  has 
passed  to  the  buyer,  the  seller  may  maintain  an  action  for  the 
price  ;  so  also  if  by  the  terms  of  the  contract  the  price  is  to 
be  paid  before  the  property  in  the  goods  passes  to  the  buyer. 
If  the  goods  have  no  ascertainable  market  value,  the  seller 
upon  tender  of  them  and  refusal  of  the  buyer  to  accept  them 
may  hold  them  as  bailee  of  the  buyer  and  may  maintain  an 
action  for  the  price.  In  some  states,  as  in  New  York,  he  may 
do  so  in  the  case  of  any  goods,  while  in  England  and  in  some 
states  the  rule  is  not  recognized  at  all. 

2.  Action  for  damages  for  nonacceptance.  If  the  buyer  unrea- 
sonably refuses  to  accept  the  goods,  the  seller  may  maintain 
an  action  against  him  for  damages  for  nonacceptance.  In  New 
York  he  may  tender  the  goods  and  sue  for  the  full  price,  but 
this  is  not  the  usual  rule.  The  measure  of  damages  is  the  loss 
to  the  seller.  If  there  is  an  available  market,  the  loss  is  the 
difference  between  the  contract  price  and  the  market  price. 

Examples:  i.  C  sells  B  a  wagon  for  $50,  delivery  and  payment  to  be 
one  week  later.  Title  passes  to  B.  If  he  refuses  to  take  the  wagon,  C  may 
sue  and  recover  the  price.  Moreover,  if  B  refuses  to  take  the  wagon,  C  may, 
according  to  some  authorities,  charge  him  for  the  storage  and  care  of  it. 

2.  C  agrees  to  build  a  wagon  for  B  according  to  a  certain  plan  and 
description.  When  it  is  completed  according  to  the  contract,  C  tenders  it 
to  B  and  the  latter  refuses  it.  (a)  According  to  most  authorities  C's  only 
remedy  is  damages  for  breach  of  contract,  since  no  title  has  passed  to  B  and 
the  wagon  is  still  C's.  {b)  But  in  New  York  and  a  few  other  states  C  may 
tender  the  wagon  to  B ;  title  will  then  pass,  and  C  may  sue  for  the  price. 

60.  Remedies  of  the  buyer.  The  buyer  may  be  the  owner  of 
the  goods  or  the  title  may  not  have  passed.  His  remedies  will 
be  more  numerous  in  the  former  case  than  in  the  latter. 

1.  Remedies  as  ozvner.  If  the  property  in  the  goods  has 
passed    to    the    buyer,    and  the    seller    wrongfully   refuses    to 


§60]  REMEDIES  9 1 

deliver  the  goods,  the  buyer  may  treat  the  seller  as  having 
converted  them.  This  allows  the  buyer  to  replevin  the  goods, 
thus  actually  getting  possession  of  them,  or  to  sue  in  tort  for 
conversion,  thus  getting  their  value  in  money. 

2.  Action  for  damages  for  breach  of  contract.  If  the  prop- 
erty in  the  goods  has  not  passed  to  the  buyer,  and  the  seller 
wrongfully  refuses  to  deliver  the  goods,  the  buyer  may  main- 
tain an  action  for  damages  for  nondelivery.  The  measure  of 
damages  is  the  loss  resulting  naturally  to  the  buyer.  If  there 
is  a  market,  the  measure  is  ordinarily  the  difference  between 
the  contract  price  and  the  market  price  at  the  time  delivery  was 
due ;  these  are  called  general  damages.  Damages  may  be  in- 
creased by  knowledge  communicated  to  the  seller,  at  the  time 
the  contract  is  made,  of  the  use  to  which  the  buyer  intends  to 
put  the  goods  ;  these  are  called  special  damages. 

Examples:  1.  B  purchases  1000  bushels  of  wheat  of  C,  to  be  delivered 
September  1,  at  80  cents  a  bushel.  C  refuses  to  deliver  on  that  date,  and 
wheat  is  then  90  cents  a  bushel  in  the  same  market.  B's  damages  are  10 
cents  per  bushel,  or  $100. 

2.  B  orders  of  C  a  shaft  to  replace  a  broken  one  in  his  mill,  and  notifies 
C  that  the  mill  must  be  idle  until  the  shaft  is  delivered.  C  agrees  to  deliver 
it  by  a  certain  date,  and  fails  to  do  so.  B  may  recover  as  special  damages 
the  loss  resulting  from  the  idleness  of  the  mill  while  he  is  with  due  diligence 
procuring  another  shaft  after  C's  failure  to  deliver  at  the  appointed  time. 
But  for  such  notice  to  the  seller,  B's  damages  would  be  merely  the  differ- 
ence between  the  price  he  agreed  to  pay  C  for  the  shaft  and  the  price  he  is 
obliged  reasonably  to  pay  for  one  elsewhere. 

3.  B  bought  goods  of  C,  to  be  delivered  January  15,  informing  C  that 
he  wished  to  put  his  salesmen  on  the  road  on  that  date  with  the  goods. 
C  delayed  delivery  and  B's  salesmen  were  two  weeks  idle  in  consequence. 
B  may  recover  the  loss  of  profits  on  resales  due  to  the  delay  of  C.  So  if  B 
to  C's  knowledge  had  resold  the  goods  to  D,  to  be  delivered  January  20, 
and  had  to  pay  damages  to  D  for  nondelivery,  he  could  recoup  these 
damages  from  C.  But  these  results  ensue  only  when  C  has  express  notice 
of  the  use  to  which  B  intends  to  put  the  goods  and  the  contract  is  made 
in  contemplation  of  that. 

3.  Action  for  breach  of  ivarranty.  This  has  already  been  dis- 
cussed (see  sec.  57  ante). 


92  SALES  OF  GOODS  [Ch.  iv] 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  45.  Define  contract  of  sale ;  executed  sale ;  executory  sale. 
What  are  "goods"?  In  what  cases  may  a  buyer  get  better  title  than  the 
seller  had?  When  not?  Who  is  a  purchaser  in  good  faith  and  for  value? 
Is  an  antecedent  debt  value?  Distinguish  sale  and  barter.  How  may  the 
price  be  fixed?  What  is  a  bill  of  sale?  Draw  a  bill  of  sale  of  a  pair  of 
horses,  buggy,  harness,  whip,  lap  robe,  for  $350. 

Problem  1.  B,  in  the  name  of  C,  orders  goods  of  D,  who  supplies  them 
supposing  he  is  dealing  with  C.  After  B  gets  the  goods  he  sells  them  to 
E,  who  has  no  knowledge  of  B's  trick.  D  then  brings  an  action  to  recover 
the  goods  from  E.    Result? 

Problem  2.  B  is  induced  by  fraud  to  sell  and  transfer  goods  to  C,  whose 
creditors  then  seize  the  goods.  B  seeks  to  recover  the  goods  from  the 
creditors.    Can  he  do  so  ? 

Problemj.  In  the  above  case  C  pledges  the  goods  to  a  creditor  as 
security  for  a  preexisting  debt.    Can  B  recover  them? 

46.  What  is  the  seventeenth  section  of  the  Statute  of  Frauds?  What 
are  "  goods,  wares,  and  merchandise"?  Are  choses  in  action  goods?  How 
can  you  tell  whether  a  contract  is  for  the  sale  of  goods  or  for  work  and 
labor?  State  the  different  tests.  Is  grass  realty  or  personalty?  What 
difference  does  it  make?  What  constitutes  acceptance  and  receipt?  What 
is  part  payment?  What  should  the  note  or  memorandum  contain?  When 
may  it  be  made?  What  is  signing?  What  is  subscribing?  Write  a  contract 
of  sale. 

Problem  4.  C  agreed  orally  to  make  for  B  a  set  of  artificial  teeth  for 
$75,  and  B  agreed  to  pay  C  that  sum.  When  the  teeth  were  finished 
B  refused  to  take  them.  C  sues  for  the  price.  B  pleads  the  Statute  of 
Frauds.    Result  ? 

Problem  5.  B  orally  agrees  to  cut  and  deliver  to  C  certain  trees  stand- 
ing on  B's  land  for  the  price  of  $15.  B  refuses  to  perform,  and  when  sued 
sets  up  the  Statute  of  Frauds.    Is  B  in  the  right? 

Problem  6.  B  writes  C,  "  Please  quote  price  of  brass  hoops."  C  wrote 
B  a  letter  in  regard  to  other  matters  and  added  an  unsigned  postscript  as 
follows:  "  P.S.  Will  make  price  of  hoops.  1  if  lb."  B  answered,  ordering 
two  tons.  C  replied,  acknowledging  the  order.  All  the  writings  were 
subscribed  except  the  postscript.  If  the  statute  requires  the  memorandum 
to  be  subscribed,  are  these  letters  a  sufficient  memorandum  ? 

Problem  7.  B  examined  barrel  hoops  at  C's  factory  and  agreed  orally 
to  purchase  a  quantity  for  $200.    B  told  C  to  deliver  them  at  the  steamer 


REVIEW  QUESTIONS  AND  PROBLEMS  93 

Curlew  for  transportation.  C  delivered  them  at  the  steamer.  The  Curlew 
was  lost  at  sea  with  her  cargo.  C  sues  B  for  the  price.  B  sets  up  the 
Statute  of  Frauds.    Were  the  goods  "accepted   and  received"  by  B? 

Problem  8.  B  bought  a  carriage  of  C  for  #350,  but  it  remained  in  C's 
possession,  and  there  was  no  payment  and  no  memorandum.  Some  changes 
were  ordered  after  which  B  inspected  the  carriage  and  approved  it.  Later 
B  hired  a  team  of  horses  and  drove  out  in  the  carriage  but  returned  it  to 
C's  warehouse.  He  then  refused  to  take  and  pay  for  it.  C  sues  B,  who 
pleads  the  Statute  of  Frauds.    Result? 

Problem  g.  B  goes  into  a  store  and  buys  on  credit  dress  goods  and 
trimmings  amounting  to  $124.  Among  the  purchases  is  a  spool  of  thread  at 
five  cents.  B  takes  the  spool  of  thread  home.  Later  she  refuses  to  take 
the  goods  and  pleads  the  Statute  of  Frauds.    What  result? 

Problem  10.  B  and  C  made  an  oral  contract  for  the  sale  and  purchase 
of  goods  of  the  value  of  $2500,  and  each  deposited  $200  in  the  hands  of  X, 
to  be  forfeited  by  the  party  who  should  refuse  to  perform  the  contract. 
B  refused  to  perform.  C  sues  B  for  breach,  and  B  pleads  the  Statute  of 
Frauds.    C  replies  that  there  was  part  payment.    Result? 

47.  Why  is  it  important  to  determine  when  title  passes?  What  are 
specific  goods?    What  are  unascertained  goods?    Illustrate. 

48.  State  the  general  rule  as  to  when  title  passes  in  the  sale  of  specific 
goods.    State  the  six  particular  rules.    Illustrate  each. 

Problem  1  r.  C  sold  lumber  to  B  which  the  parties  culled  out  and  agreed 
upon.  C  agreed  to  deliver  it  at  the  cars.  There  was  a  written  memoran- 
dum. While  still  in  C's  yard  the  lumber  burned.  C  sues  B  for  the  price. 
Did  the  title  pass  to  B  so  as  to  make  the  loss  his  ? 

Problem  12.  Sale  of  119  specific  bales  of  cotton  at  31^  cents  a  pound, 
payable  cash  on  delivery,  the  cotton  to  be  weighed  and  sampled  before 
delivery.  Seventy  bales  are  weighed  and  sampled,  but  not  delivered,  when 
the  whole  119  bales  are  destroyed  by  fire.  Is  the  buyer  liable  for  the 
119  bales?    Is  he  liable  for  the  70  bales? 

Problem  13.  X  sells  B  238  bags  of  coffee,  marked  and  designated,  but 
X  agrees  to  weigh  the  bags  in  order  to  ascertain  the  total  price,  the  sale 
being  by  the  pound.     Has  title  passed  to  B? 

49.  State  the  rules  to  determine  when  title  passes  in  the  sale  of  unascer- 
tained goods.    What  are  fungible  goods?    When  is  an  appropriation  final? 

Problem  14.  B  purchased  of  C  200  bushels  of  coin  out  of  a  lot  of  400 
to  500  bushels  in  C's  crib.  It  was  to  be  left  until  it  hardened,  and  then 
C  was  to  measure  and  deliver  it.  C's  creditors  levied  on  the  whole  lot. 
C  then  delivered  200  bushels  to  B,  and  the  creditors  seek  to  recover  the 
corn  from  B.    Result? 


94  SALES  OF  GOODS  [Ch.  IV] 

Problem  fj.  In  the  above  case  the  crib  burns  and  all  the  corn  is 
destroyed.     Must  C  pay  B  for  the  200  bushels? 

Problem  16.  Assume  in  Problems  14  and  15  that  C  has  agreed  to  deliver 
the  corn  and  that  B  sues  for  breach  of  this  promise.    May  he  recover? 

Problem  17.  C  orders  by  mail  a  barrel  of  shellac  of  B,  who  selects  a 
barrel  answering  the  description  and  ships  it  to  C  by  the  X.  Ry.  as  directed. 
In  transit  it  is  lost.  May  B  maintain  an  action  against  the  X.  Ry.  for  its 
loss? 

Problem  iS.  In  the  above  case  B  took  the  bill  of  lading  in  his  own  name 
and  retained  it.    Can  B  sue  the  X.  Ry.  for  the  loss  ? 

50.  Where  is  the  risk  of  loss  after  a  contract  of  sale  ?  Where  is  the 
right  to  gain  or  increase  ?  Do  these  rules  apply  to  a  sale  and  delivery  when 
seller  retains  title  as  security  for  payment  ? 

51.  State  the  duties  of  the  seller.  Where  is  delivery  to  be  made?  If  the 
buyer  orders  50  barrels  of  apples  and  the  seller  delivers  48  barrels,  must  the 
buyer  take  them?  How  is  it  if  the  seller  delivers  55  barrels?  If  the  seller 
delivers  50  barrels,  what  right  has  the  buyer? 

52.  State  the  duties  of  the  buyer. 

53.  Define  warranty;  express  warranty;  implied  warranty  or  condition. 
Which  are  a  part  of  the  main  contract  of  sale  and  which  not  ? 

54.  Does  an  express  warranty  arise  without  words?  Who  determines 
whether  there  is  an  express  warranty?  What  is  the  test?    What  is  a  "  puff  "? 

Problem  ig.  B  sold  a  horse  to  C.  During  the  negotiations  B  repre- 
sented the  horse  to  be  sound.  It  was  unsound.  C  sues  B  for  breach  of 
warranty.    B  objects  that  he  did  not  "warrant"  the  horse.     Result? 

55.  State  the  implied  warranties  and  when  they  occur.  When  is  a  war- 
ranty of  title  not  implied  ?  When  is  there  warranty  that  goods  are  mer- 
chantable? Is  there  a  warranty  of  fitness  for  the  purpose  in  a  sale  by  a 
retailer?    Is  there  any  special  implied  warranty  in  the  sale  of  provisions? 

Problem  20.  B  stole  a  horse  and  had  him  sold  at  auction.  C  bought  at 
the  auction  and  then  resold  the  horse  to  D.  The  true  owner  traced  it  and 
recovered  it  from  D,  who  now  sues  C  for  breach  of  warranty  of  title. 
Result? 

Problem  si.  B  sold  C  184  bales  of  hemp,  and  C  at  the  time  of  the  sale 
inspected  it  before  purchasing  by  opening  several  bales.  Most  of  it  later 
turned  out  to  be  bad.    C  sues  B  for  breach  of  implied  warranty.    Result  ? 

Problem  22.  C  orders  of  B  "  Calcutta  linseed."  It  came  mixed  with 
rape  and  mustard  seed.  All  linseed  has  some  such  seeds  mixed  with  it; 
this  had  more  than  the  usual  quantity.  C  contends  that  the  contract  is  not 
satisfied  by  offering  this  article,  —  that  it  does  not  answer  the  description. 
How  would  you  hold? 


REVIEW  QUESTIONS  AND  PROBLEMS  95 

Problem  23.  B  bought  of  C  a  car  load  of  cedar  posts  to  be  shipped  by  C 
to  B.  When  they  arrived  B's  servants  unloaded  a  part  of  them,  and  discov- 
ering they  were  not  of  good  quality  so  informed  B.  The  latter  then  inspected 
them,  and  because  they  were  not  of  good  quality  had  those  taken  from 
the  car  replaced,  and  refused  the  whole  lot.  C  sues  B  for  the  price.  Is  B 
liable  ? 

Problem  24.  C  bought  of  B  by  sample  "  102  bales  second  quality  Ceara 
scrap  rubber  as  per  sample."  When  the  bales  arrived  they  were  found  not 
to  be  second  quality,  but  inferior,  though  they  were  like  the  sample.  Is  C 
bound  to  keep  the  rubber  and  pay  for  it  without  offsetting  the  damages  for 
breach  of  warranty  ? 

Problem  25.  (a)  A  manufacturer  sells  B  powder  for  blasting.  It  is  of 
poor  quality  and  unfit  for  the  purpose.    Is  there  a  breach  of  warranty? 

(b)  A  dealer  who  purchased  of  the  manufacturer  sold  C  some  of  the 
same  powder  for  the  same  purpose.  Is  the  dealer  liable  to  C  for  breach  of 
warranty  ? 

56.  What  is  meant  by  the  rule  of  caveat  emptor?  What  are  the  excep- 
tions to  the  rule?  If  A  sells  B  a  horse  without  express  warranty,  is  there 
any  implied  warranty?     If  A  sells  B  seeds  ? 

57.  Can  the  buyer  rescind  the  contract  for  a  breach  of  an  express  war- 
ranty if  title  has  passed?  for  breach  of  an  implied  warranty?  If  goods 
are  ordered  by  description  and  they  do  not  answer  the  description,  may  the 
buyer  take  them  and  sue  for  breach  of  implied  warranty  ? 

58.  State  all  the  rights  of  an  unpaid  seller  against  the  goods.  What  is 
the  seller's  lien  ?  How  is  it  lost  ?  What  is  the  right  of  stoppage  in  transitu  ? 
When  may  it  be  exercised?  How  is  it  lost?  Explain  the  exercise  of  the 
right  of  resale  ;   of  rescission. 

Problem  26.  B  sells  C  a  horse,  payment  and  delivery  to  be  one  week 
iater.  At  the  time  fixed  C  does  not  take  or  pay  for  the  horse.  Explain  all 
the  remedies  to  which  B^may  resort  against  the  property  itself. 

Problejn  2j.  B  sells  C  a  horse  on  credit,  delivery  to  be  one  week  later 
and  payment  one  month  later.    What  are  B's  rights  against  the  property  ? 

59.  State  the  seller's  rights  against  the  buyer.  How  does  he  measure 
his  damages  for  a  breach  ? 

60.  State  the  remedies  of  the  buyer  (a)  where  the  title  has  passed  and 
(b)  where  it  has  not  passed.  What  are  general  and  what  special  damages? 
When  may  special  damages  be  recovered  ? 


CHAPTER  V 
BAILMENT   OF   GOODS 

61.  Definition  and  distinctions.  A  bailment1  of  goods  is  a 
transfer  of  the  possession  without  a  transfer  of  the  general 
ownership,  upon  a  contract,  expressed  or  implied,  that  after 
the  purpose  of  the  transfer  shall  have  been  accomplished  the 
property  shall  be  redelivered  to  the  bailor  or  to  some  person 
designated  by  him. 

The  person  making  the  delivery  is  called  the  bailor.  The 
person  to  whom  it  is  made  is  called  the  bailee. 

Such  a  transfer  of  possession  usually  occurs  by  delivery 
from  the  bailor  to  the  bailee.  It  may  take  place,  however, 
without  such  delivery. 

Examples.  If  one  finds  an  article  and  takes  it  into  his  custody,  he  is  a 
bailee  for  the  unknown  owner,  although  there  has  been  no  delivery,  and  is 
under  an  obligation  created  by  the  law  to  return  it  to  the  true  owner  upon 
demand.  So  if  one  steals  or  converts  property  belonging  to  another,  he  is 
a  bailee,  and  the  law  creates  for  him  a  promise  to  return  it  to  the  owner.  So 
also  an  officer  who  seizes  goods  under  a  legal  process  is  a  bailee  of  the 
goods.  In  all  these  cases  there  is  a  transfer  of  possession  without  delivery, 
but  in  all  of  them  the  bailee  is  bound  to  deliver  up  the  property  either  upon 
demand  or  when  the  purpose  for  which  he  has  taken  it  is  accomplished. 

The  duty  of  the  bailee  is  usually  fixed  by  his  own  promise,  and  is  there- 
fore the  result  of  contract.  But  in  the  cases  last  given  there  is  no  promise 
and  no  real  contract.  The  law  treats  these  cases  upon  the  fiction  that  there 
is  a  promise,  that  is,  the  law  creates  the  promise  and  requires  the  bailee  to 
return  the  goods  or  pay  damages  for  withholding  them. 

The  consideration  for  the  bailee's  promise  is  the  detriment 
suffered  by  the  bailor  in  parting  with  his  property.  Sometimes 
the  bailor  furnishes  some  other  consideration,  as  when  he  pays 
or  promises  to  pay  the  bailee  for  caring  for  the  property  or 
doing  work  upon  it.    But  in  the  case  of  a  gratuitous  bailee  — 

1  Bailment  is  from  the  French  bailler  to  deliver. 
96 


[§62]  CLASSIFICATION  97 

one  who  cares  for  the  property  without  compensation  —  the 
only  consideration  is  the  parting  with  the  property  by  the 
bailor.  This  is  an  act  which  the  owner  is  not  legally  bound  to 
do,  and  is  therefore  a  sufficient  consideration. 

Bailment  applies  only  to  personal  property.  This  may  be 
corporeal,  as  a  horse,  or  incorporeal,  as  a  document  of  title. 

The  bailor  need  not  be  the  true  owner  of  the  property.  One 
may  hire  a  horse  and  put  him  in  a  livery  stable ;  in  such  a 
case  there  are  two  bailments,  —  by  the  owner  to  the  hirer,  and 
by  the  hirer  to  the  livery-stable  keeper.  One  who  finds  a  jewel 
may  deliver  it  to  a  jeweler  to  be  tested ;  in  such  a  case  the 
finder  is  bailor  and  the  jeweler  is  bailee,  and  the  finder  may 
recover  the  jewel,  or  its  value,  if  the  jeweler  refuses  to  sur- 
render it.    The  bailee  cannot  dispute  his  bailor's  title. 

Distinctions.  A  bailment  must  be  distinguished  from  a  sale  or  barter. 

A  bailment  differs  from  a  sale  in  this  :  in  a  sale  there  is  a  transfer  of 
the  general  ownership  or  title,  while  in  a  bailment  there  is  the  transfer  of 
possession  for  a  particular  purpose,  the  general  ownership  or  title  remain- 
ing in  the  bailor. 

A  bailment  differs  from  a  barter  for  the  same  reason.  Further,  in  a  bail- 
ment the  identical  thing  is  to  be  returned,  though  sometimes  in  an  altered 
form,  while  in  a  barter  some  other  thing  is  to  be  returned.  If  one  delivers 
grain  to  be  ground  into  meal  and  the  meal  returned,  this  is  a  bailment. 
But  if  one  takes  his  grain  to  a  mill  and  receives  therefor  meal  already- 
ground,  this  is  a  barter  or  sale.  If  one  "  lends  "  his  neighbor  a  bag  of  oats 
to  feed  the  neighbor's  horse,  this  is  a  barter  because  the  same  oats  are  not  to 
be  returned  but  a  like  quantity  of  oats  ;  this  is  technically  called  a  mutuum. 

Sometimes  there  is  a  bailment  with  an  option  to  purchase,  as  where  there 
is  a  "sale  on  approval"  (see  p.  76,  ante).  In  such  case  the  transaction 
becomes  a  sale  when  the  bailee  signifies  his  approval. 

Sometimes  there  is  a  bailment  with  permission  to  mix  the  goods  with 
others  of  a  like  kind,  as  where  grain  is  placed  in  an  elevator  with  the  grain 
belonging  to  other  bailors.  The  owners  become  owners  in  common  of  the 
mass,  according  to  their  respective  shares.  If  there  is  no  such  permission, 
express  or  implied,  the  bailee  must  keep  the  bailor's  goods  separate  from 
his  own  or  others'. 

62.  Classification  of  bailments.  Bailments  fall  into  two  classes, 
and  each  has  subdivisions.  The  two  classes  are  (I)  bailments 
solely  for  the  benefit  of  one  party,  and  (II)  bailments  for  the 
mutual  benefit  of  both  parties. 


98  BAILMENT  [Ch.  V 

(I)  Bailments  solely  for  the  benefit  of  one  party,  or  gratuitous 
bailments,  are  divided  into  two  classes. 

i.  Bailments  for  the  sole  benefit  of  the  bailor  are  called  either 
a  deposit  (or  in  the  Roman  law,  depositum)  or  a  mandate  (or 
in  the  Roman  law,  mandatum).  These  are  bailments  in  which 
the  bailee  without  compensation  is  to  keep  the  property  of  the 
bailor  for  him  (deposit),  or  to  do  something  to  or  about  the 
property  for  the  bailor's  benefit  (mandate). 

Examples.  C  undertakes  without  reward  to  keep  D's  jewels.  C  without 
reward  undertakes  to  repair  D's  watch.  C  without  reward  undertakes  to 
carry  D's  grist  to  mill.    The  first  case  is  a  deposit.    The  others  are  mandates. 

2.  A  bailment  for  the  sole  benefit  of  the  bailee  is  called  a 
commodatum,  that  is,  a  gratuitous  loan.  This  is  a  bailment  in 
which  the  bailor  without  compensation  allows  the  bailee  to  use 
his  property. 

Examples.  D  loans  C  a  jewel  to  wear,  or  D  loans  C  his  horse  to  drive, 
without  compensation. 

(II)  Mutual  benefit  bailments  may  be  divided  into  three 
classes,  with  two  additional  special  instances. 

1.  The  delivery  of  a  chattel  as  security  for  a  debt.  This  is 
called  a  pawn  or  pledge,  or  giving  of  collateral  security  (in  the 
Roman  law,  pignus). 

Exa7nples.  D  borrows  money  of  C  and  delivers  his  watch  to  C  as 
security.  D  borrows  money  of  a  bank  and  delivers  bonds  or  shares  of 
stock  as  collateral  security. 

2.  The  delivery  of  a  chattel  to  the  bailee  to  be  used  by  him 
and  such  use  paid  for.  This  is  like  the  second  case  given  above, 
except  that  the  bailee  is  to  compensate  the  bailor.  It  is  called 
a  hiring,  or,  in  the  Roman  nomenclature,  locatio  rci,  the  hired 
use  of  a  thing. 

Examples.  D  loans  a  jewel  to  C  to  wear,  or  D  loans  his  horse  to  C  to 
drive,  in  each  case  for  a  stipulated  price. 

3.  The  delivery  of  a  chattel  to  the  bailee  to  keep  safely,  or 
to  do  work  upon,  for  a  compensation.    This  is  like  the  first  case 


§  62]  CLASSIFICATION  99 

given  above,  except  that  the  bailee  is  to  be  paid  instead  of  act- 
ing gratuitously.  This  is  called  a  hiring  (of  services),  or,  in  the 
Roman  nomenclature,  locatio  operis,  hired  services  about  a  thing. 
There  are  three  special  instances  of  this  :  (a)  hired  custody  of 
a  thing  (locatio  custodiae);  (b)  hired  services  upon  a  thing 
{locatio  operis  faciendi) ;  (c)  hired  carrying  of  a  thing  {locatio 
operis  mercium  vehendarum). 

Examples.  C  undertakes  for  a  price  to  keep  D's  jewels  safely.  C  for  a 
price  undertakes  to  repair  D's  watch.  C  for  a  price  undertakes  to  carry  D's 
grain  to  mill. 

The  following  special  cases  of  delivery  for  safe  keeping  or 
for  transportation  fall  under  mutual  benefit  bailments  but  call 
for  separate  treatment. 

1.  Innkeepers.  The  intrusting  of  goods  to  the  protection 
of  an  innkeeper  by  a  guest  at  the  inn  gives  rise  to  peculiar 
liabilities. 

2.  Common  carriers.  The  delivery  of  goods  by  a  shipper 
to  a  common  carrier  for  transportation  gives  rise  to  peculiar 
liabilities. 

The  following  special  cases  do  not  fall  strictly  under  bailment 
but  may  be  treated  here  for  convenience. 

1.  Public  carriers  of  passengers  and  baggage. 

2.  Telegraph  and  telephone  companies. 

The  classification  of  bailments  may  be  thus  summarized: 

Classification  of  Bailments 

I.  Gratuitous.  II.  Mutual  Benefit. 

1.  Gratuitous  services.  1.  Pledge  or  pawn. 

a.  Deposit.  2.  Hired  use  of  a  thing. 

b.  Mandate.  3.  Hired  services  about  a  thing. 

2.  Gratuitous  loans.  a.  Custody  of  a  thing  (with  special 

case  of  innkeepers). 

b.  Work  upon  a  thing. 

c.  Transportation    of    a    thing    (with 

special  case  of  common  carriers). 


IOO  BAILMENT  [Ch.  V 


I.  Bailments  solely  for  Benefit  of  One  Party 

63.  Bailments  for  sole  benefit  of  bailor.  These  bailments  lay  on 
the  bailee  the  lightest  duties,  since  he  derives  no  benefit  from 
them. 

i .  Hotv  created.  This  bailment  may  be  created  by  contract,  as 
where,  upon  the  bailee's  promise  to  care  for  the  article  gratui- 
tously, the  bailor  delivers  it  to  the  bailee.  Some  writers  do  not 
regard  this  strictly  as  contract  because  the  only  consideration  for 
the  promise  is  the  parting  with  possession  by  the  promisee.  It  is, 
however,  convenient  to  treat  the  relation  as  the  result  of  contract. 

This  bailment  may  also  be  created  by  a  voluntary  undertaking 
of  the  bailee  without  any  action  on  the  part  of  the  bailor,  as, 
for  example,  where  one  finds  lost  property  and  takes  it  into  his 
possession. 

It  may  also  be  created  without  a  voluntary  undertaking  of 
the  bailee,  as  where  goods  are  cast  by  a  flood  or  other  force  of 
nature  upon  the  lands  of  the  bailee. 

2.  Bailor  s  obligations.  As  these  are  gratuitous  bailments  the 
bailor  is  not  bound  to  compensate  the  bailee  for  his  services  in 
the  care  of  the  property  or  for  any  work  done  upon  it.  But  if 
the  bailee  has  not  by  agreement  undertaken  to  bear  unusual 
expenses,  the  bailor  must  indemnify  him  for  such  actual  dis- 
bursements. The  voluntary  bailor  is  also  bound  to  warn  the 
bailee  of  any  danger  of  which  the  former  is  aware,  if  such 
danger  increases  the  ordinary  risk  of  the  bailment,  and  is  not 
apparent  to  the  bailee. 

Examples  :  i.  C  undertakes  without  compensation  to  keep  and  feed  D's 
dog.    C  is  obliged  to  pay  a  dog  tax.    D  must  reimburse  C. 

2.  C  undertakes  without  compensation  to  take  and  care  for  D's  dog. 
Known  to  D  but  unknown  to  C  the  dog  is  vicious.  C  is  bitten  by  the  dog. 
D  is  liable  to  C  for  the  injury.  But  D  would  not  be  liable  if  he  did  not 
know  of  the  vicious  propensities  of  his  dog  or  if  he  warned  C  of  them. 

3.  Duties  of  bailee.  The  bailee  is  not  bound  to  undertake  the 
bailment  even  after  he  has  promised  to  do  so.  This  is  because 
there  is  no  consideration  for  his  promise,  since  the  bailor  has 


§63]  FOR  BENEFIT  OF  ONE  PARTY  IOI 

promised  him  nothing  in  return.  But  if  the  bailee  does  under- 
take the  bailment  by  receiving  the  goods,  he  then  comes  under 
certain  obligations  to  the  bailor. 

(a)  The  bailee  must  not  by  gross  negligence  injure,  destroy, 
or  lose  the  goods.  It  is  said  that  since  the  bailee  is  acting 
gratuitously  he  is  bound  to  use  only  slight  care  toward  the 
subject  of  the  bailment  and  is  liable  only  for  gross  negligence. 
Whatever  this  may  mean,  —  and  it  is  a  matter  difficult  to  define 
accurately,  —  it  is  clear  that  less  care  is  exacted  of  the  gratui- 
tous bailee  than  of  any  other.  The  amount  of  care  must,  how- 
ever, vary  in  proportion  to  the  risk. 

Example  3.  More  care  would  be  required  in  the  keeping  of  a  diamond 
tli an  in  the  keeping  of  a  plow;  more  skill  and  care  would  be  required  in 
the  repairing  of  a  watch  than  in  the  repairing  of  an  umbrella.  The  court 
instructs  the  jury  that  the  gratuitous  bailee  is  required  to  use  only  slight 
care  and  is  liable  only  for  gross  negligence,  that  this  is  the  care  that  persons 
of  less  than  ordinary  prudence,  but  still  of  prudence,  exercise  under  like 
circumstances,  and  that  whether  the  bailee  exercised  this  care  in  the  case  in 
litigation  is  a  question  of  fact  for  the  jury  to  determine. 

(b)  The  bailee  must  not  use  the  article  except  so  far  as  its  use 
is  reasonable  or  necessary  for  its  proper  care.  The  bailee  might 
drive  a  horse  to  keep  it  in  health,  or  milk  a  cow,  but  he  could 
not  use  the  horse  for  plowing  his  own  field,  or  wear  a  diamond 
intrusted  to  him. 

(c)  The  bailee  must  redeliver  the  article  at  the  termination 
of  the  bailment,  together  with  any  increase  or  profit  derived 
from  it.  If  it  has  been  lost,  the  bailee  is  liable  only  if  the  loss 
was  due  to  his  gross  negligence. 

Examples:  4.  B  undertakes  gratuitously  to  keep  C's  furs.  He  keeps 
them  so  negligently  that  the  moths  injure  them.  B  is  not  liable  unless  this 
is  found  to  be  gross  negligence. 

5.  B  wears  the  furs  and  loses  them.  B  is  liable.  He  had  no  right  to  use 
the  furs,  and  in  doing  so  assumed  the  entire  risk  of  their  safety. 

6.  B  undertakes  gratuitously  to  keep  C's  jewels.  B  locks  them  up  in  his 
desk.  Burglars  break  open  the  desk  and  steal  the  jewels.  B  is  not  liable 
unless  he  was  grossly  negligent,  which  could  hardly  be  the  case  under  these 
facts. 

7.  B  leaves  the  jewels  in  an  unlocked  drawer  and  they  are  stolen.  This 
might  be  gross  negligence. 


I02  BAILMENT  [Ch.  V 

4.  Termination  of  bailment.  The  bailment  is  terminated 
whenever  either  party  elects  to  terminate  it.  This  is,  perhaps, 
subject  to  the  qualification  that  if  the  bailee  has  entered  upon 
some  work  to  be  done  upon  the  article  he  is  bound  to  finish  it. 
The  death  of  either  party  terminates  the  bailment.  So  also 
does  the  insanity  of  either. 

64.  Bailments  for  bailee's  sole  benefit.  These  bailments  lay 
on  the  bailee  the  heaviest  duties,  since  he  alone  benefits  from 

them. 

1.  How  created.  This  form  of  bailment  arises  only  by  con- 
tract, because  it  requires  the  assent  of  the  bailor  to  lend  and 
the  assent  of  the  bailee  to  borrow.  A  promise  to  lend  is  not 
binding  because  there  is  no  consideration  for  it ;  but  after  the 
loan  is  made  the  contract  is  complete.  The  absence  of  compen- 
sation to  the  bailor  characterizes  this  class  of  bailments. 

2.  Obligations  of  bailor.  The  sole  obligation  of  the  bailor 
is  to  warn  the  borrower  of  any  defect  known  to  him  and  not 
known  or  obvious  to  the  bailee,  which  renders  the  article  dan- 
gerous. If  he  does  not,  and  the  bailee  is  injured  in  consequence 
of  such  defect,  the  bailor  is  liable  to  him  for  the  injury. 

Example  1.  B  lends  his  horse  to  C  to  drive.  Known  to  B  but  unknown 
to  C  the  horse  is  a  runaway.  If  B  does  not  warn  C  of  this,  and  the  horse 
runs  away  and  injures  C,  B  is  liable. 

3.  Duties  of  the  bailee.  The  obligations  of  the  bailee  may  be 
fixed  by  the  contract  itself.  Where  they  are  not  specified,  the 
following  will  be  implied. 

(a)  The  bailee  must  exercise  great  care  in  keeping  or  using 
the  article,  and  is  liable  for  slight  negligence.  The  bailment 
being  for  the  bailee's  sole  benefit,  the  law  exacts  of  him  greater 
care  than  in  the  case  of  any  other  bailee.  He  is  not  liable  for 
inevitable  accident  but  only  for  such  injuries  as  by  the  exercise 
of  great  diligence  he  could  have  prevented.  In  the  presence 
of  any  danger  he  ought  to  prefer  the  safety  of  the  borrowed 
article  to  the  safety  of  his  own  property.  In  this  respect  this 
bailment  is  at  the  opposite  extreme  from  the  one  for  the  bailor's 
sole  benefit. 


§64]  FOR  BENEFIT  OF  ONE  PARTY  103 

Exa?nple  2.  C  loans  B  his  watch.  B  loses  it.  If  this  was  due  to  a  want 
of  great  care  (more  than  one  ordinarily  takes  of  his  own  property),  B  is  liable 
to  C.    This  is  a  question  for  the  jury  under  proper  instructions. 

(b)  The  bailee  may,  of  course,  use  the  article,  but  he  must 
not  lend  it  to  others  unless  it  is  understood  that  he  may  do  so, 
and  must  use  it  in  accordance  with  the  contract  or  understand- 
ing. Any  material  deviation  may  cast  upon  him  the  liability  of 
insuring  the  safety  of  the  article  or  may  render  him  liable  in 
tort  for  its  conversion. 

Examples :  3.  C  borrows  D's  horse  to  drive  to  A,  and  drives  instead  to 
B  in  another  direction.  The  horse  dies  without  C's  fault.  C  must  pay  for 
the  horse.  He  has  technically  converted  it  and  is  absolutely  liable.  If  the 
horse  had  died  without  C's  fault  while  he  was  driving  to  A,  he  would  not 
have  been  liable. 

4.  C  borrows  D's  horse  to  drive  and  permits  E  to  drive  it.  C  is  abso- 
lutely liable  for  any  injury  to  the  horse  while  in  E's  hands.  But  it  may  be 
implied  that  another  is  to  use  the  article.  If  C  takes  D's  horse  in  order 
to  try  him  before  buying,  C  may  permit  a  competent  horseman  to  make 
the  test. 

(c)  The  bailee  must  redeliver  the  article  with  its  increase 
or  profits.  He  cannot  deny  his  bailor's  title,  that  is,  he  cannot 
hold  the  article  under  a  claim  that  it  is  his  or  another  person's, 
but  must  return  it  and  resort  to  an  action  to  establish  his  claim. 

Examples:  5.  C  borrows  D's  bonds  to  pledge  in  order  to  raise  money. 
C  must  return  the  bonds  and  also  any  income  accruing  during  the  loan. 

6.  C  borrows  D's  team  and  refuses  to  return  it,  alleging  that  it  belongs 
to  his  wife,  a  sister  of  D.  This  is  not  a  good  defense.  C  must  return  the 
team,  and  the  wife  can  then  bring  an  action  to  recover  it.  C  cannot  thus 
dispute  his  bailor's  tide. 

4.  Termination  of  bailment.  A  bailment  in  the  nature  of  a 
loan  may  be  terminated  at  the  will  of  the  borrower.  Whether, 
if  it  be  for  a  definite  time,  the  lender  may  recall  it  before  the 
time  has  elapsed  is  a  doubtful  question.  Any  violation  of  the 
borrower's  duty  toward  the  article  justifies  the  lender  in  recall- 
ing it.  The  death  of  the  borrower,  or  his  insanity,  terminates 
the  bailment.  The  death  or  insanity  of  the  lender  may  not, 
possibly,  terminate  a  loan  for  a  definite  period  if  that  period 
has  not  yet  elapsed. 


104  BAILMENT  [Ch.  V 

II.  Mutual  Benefit  Bailments 

65.  Pledge  or  pawn.  This  is  a  mutual  benefit  bailment  intended 
as  a  species  of  security,  and  when  it  is  a  bank  transaction  with 
stocks,  bonds,  or  other  like  instruments  pledged,  it  is  called 
collateral  security. 

i.  How  created.  A  pledge  or  pawn  is  a  bailment  of  a  chattel 
as  security  for  a  debt  or  other  legal  obligation,  and  is  usually 
accompanied  by  a  power  in  the  bailee  to  sell  the  article  in  case 
of  default.  When  a  transaction  is  on  a  larger  scale  the  bail- 
ment is  often  called  the  giving  of  collateral  security,  as  where 
one  borrows  money  at  a  bank  and  deposits  bonds  as  security 
for  the  loan.  These  transactions  by  way  of  pledge  can  arise 
only  by  contract.  The  statutes  generally  regulate  somewhat 
strictly  the  business  of  pawnbrokers,  and  prescribe  the  rate 
of  interest  they  may  lawfully  charge  for  loans  secured  by 
pledge.  Delivery  to  the  pledgee  is  essential  to  the  creation  of 
a  pledge.  The  delivery  of  documents  of  title,  like  warehouse 
receipts  or  bills  of  lading,  constitutes  a  pledge  of  the  property 
they  represent.  Stock  certificates  should  be  accompanied  by  a 
power  to  transfer  the  title  upon  the  books  of  the  corporation 
that  issued  them. 

2.  RigJits  and  obligations  of  pledgor.  A  pledgor  of  property 
impliedly  warrants  that  he  has  good  title  to  it,  and  is  liable 
to  the  pledgee  for  a  breach  of  this  warranty  if  the  pledgee  is 
damaged  thereby.  He  has  a  right  to  assign  to  another  his 
interest  in  the  pledged  article,  that  is,  the  difference  between 
its  value  and  the  sum  for  which  it  is  pledged.  He  has  a  right 
to  redeem  the  pledge  by  payment  of  the  debt  which  it  secures. 
No  agreement  of  the  parties  can  make  the  pledge  irredeemable, 
because  this  is  regarded  by  the  law  as  oppressive  to  the  debtor, 
who  usually  gives  a  pledge  under  the  stress  of  necessity. 

3.  Rights  and  duties  of  pledgee.  The  pledgee  has  a  right  to 
assign  his  interest  in  the  pledge.  He  has  no  right  to  use  the 
pledged  article  except  so  far  as  its  use  is  necessary  to  its  proper 
care.  Any  profits  derived  from  it  the  pledgee  holds  to  apply 
toward  the  debt,  but  if  that  is  otherwise  paid,  he  must  account 


§65]  FOR  MUTUAL  BENEFIT  105 

for  them  to  the  pledgor.  He  is  to  be  reimbursed  for  any 
expenses  necessarily  incurred  in  caring  for  the  article  pledged. 
He  must  use  ordinary  care  in  keeping  and  preserving  the 
property  and  is  liable  for  ordinary  negligence.  This  case  lies 
midway  in  this  respect  between  the  bailment  for  the  bailor's  sole 
benefit  and  that  for  the  bailee's  sole  benefit.  He  must  redeliver 
the  property  when  the  pledge  is  redeemed  by  the  pledgor. 

After  the  debt  is  due  and  unpaid,  the  pledgee  may  sell  the 
property  to  pay  the  debt,  and  must  pay  to  the  pledgor  any 
surplus  above  the  debt,  interest,  and  expenses  of  sale.  If  there 
is  no  provision  in  the  contract  permitting  a  private  sale,  the 
sale  must  be  at  public  auction  after  due  notice  to  the  pledgor; 
but  it  is  often  held  that  stocks  and  bonds  may,  after  due  notice, 
be  sold  on  the  floor  of  the  stock  exchange.  The  pledgee  can- 
not purchase  at  his  own  sale.  In  the  absence  of  an  express 
provision  in  the  contract  prescribing  the  mode  of  sale,  and 
especially  where  notice  cannot  be  given  to  the  pledgor,  or 
where  there  are  conflicting  claims,  it  is  safer  for  the  pledgee 
to  secure  a  judicial  sale  under  a  decree  of  a  court  of  equity. 
In  some  states  the  statute  provides  for  the  manner  of  sale  of 
pledged  property. 

4.  Termination  of  pledge.  A  pledge  is  terminated  when  the 
property  is  redelivered  to  the  pledgor,  or  when  by  tender  or 
payment  of  the  debt  the  pledgor  is  entitled  to  have  it  rede- 
livered. A  refusal  to  redeliver  the  property  when  the  pledgor 
is  entitled  to  it  renders  the  pledgee  liable  in  tort  for  conversion. 

Examples :  1.  A  pledges  a  jewel  to  B  as  security  for  a  loan.  B  leaves 
the  jewel  at  night  in  a  show  case.  Burglars  enter  and  take  it.  B  is  liable  to 
A  for  the  loss  if  it  is  found  that  B  did  not  use  due  or  ordinary  care  for  the 
safe  keeping  of  the  jewel.  Due  care  might  require  B  to  put  the  jewel 
in  a  safe. 

2.  B  wears  the  jewel  and  it  is  lost.  B  is  liable  to  A,  for  he  assumed  the 
risk  in  wearing  the  jewel. 

3.  A  pledged  securities  to  a  bank  for  the  payment  of  a  particular  loan. 
A  paid  the  loan  and  demanded  the  securities.  The  bank  refused  to  deliver 
them  and  claimed  to  hold  them  for  another  unsecured  loan.  A  brought  an 
action  against  the  bank  for  conversion  of  the  securities  and  recovered.  The 
bank  could  hold  the  securities  for  the  particular  loan  but  for  no  other. 


io6  BAILMENT  [Ch.  V 

4.  The  bank  received  dividends  on  the  securities.  These  belong  to  A 
after  he  pays  the  loan,  or  they  may  be  deducted  from  the  loan  and  payment 
made  of  the  balance. 

5.  A  received  dividends  on  the  securities.  He  holds  them  in  trust  for 
the  bank  until  the  loan  is  paid. 

6.  A  pledgee  upon  default  sold  the  pledge  under  authority  given  by  the 
pledgor,  and  purchased  at  his  own  sale.  The  sale  may  be  avoided  at  the 
election  of  the  pledgor. 

Pawnbrokers.  In  New  York  pawnbrokers  may  take  3  per  cent  a  month 
for  the  first  six  months  and  2  per  cent  a  month  thereafter  upon  loans  not 
exceeding  $100,  and  2  per  cent  a  month  for  the  first  six  months  and  1  per 
cent  a  month  thereafter  upon  loans  exceeding  $100.  They  cannot  sell 
pawns  until  one  year  after  possession  thereof,  and  the  sale  must  be  at  public 
auction  and  conducted  by  a  licensed  auctioneer.  Notice  of  the  sale  must  be 
published  for  at  least  six  days  in  two  daily  newspapers.  Any  surplus  on  the 
sale  shall  be  turned  over  to  the  pledgor.  In  Massachusetts  the  mayor  and 
aldermen  or  other  licensing  board  of  a  city  may  fix  the  rate  of  interest,  and 
articles  may  be  sold  at  public  auction  after  four  months. 

66.  Bailee  hires  an  article  of  bailor.  This  is  also  a  mutual 
benefit  bailment,  since  both  parties  derive  a  benefit  from  it. 

1.  Hozv  created.  This  bailment  arises  only  by  contract.  The 
bailor  agrees  to  deliver  to  the  bailee  an  article  to  be  used  by 
the  latter,  who,  in  turn,  agrees  to  pay  the  bailor  a  compensa- 
tion for  such  use.  If  the  bailorrefuses  to  deliver  or  the  bailee 
to  receive,  there  is  a  breach  of  contract  for  which  damages  may 
be  recovered.  When  a  delivery  is  actually  made  and  accepted, 
the  bailment  begins. 

2.  Rights  and  liabilities  of  bailor.  The  bailor  warrants  his 
title  and  warrants  that  the  bailee  shall  not  be  disturbed  in  his 
possession  by  one  maintaining  a  superior  title.  He  must  warn 
the  bailee  of  any  defects,  known  to  him  and  not  observable  by 
the  bailee,  which  render  the  article  dangerous  for  the  purpose 
for  which  it  is  hired.  So  also  the  bailor  must  use  due  care  to 
discover  and  remady  defects. 

Example  1.  B  lets  to  C  a  horse  and  carriage  and  the  carriage  breaks 
down  and  injures  C  from  a  defect  which  by  the  use  of  due  care  B  might 
have  discovered.    B  is  liable  to  C. 

3.  Rights  and  duties  of  bailee.  The  rights  and  duties  of  the 
bailee  may  be  fixed  in  part  by  the  contract.  In  the  absence  of 
contract  provisions  the  following  general  rules  would  govern. 


§66]  FOR  MUTUAL  BENEFIT  107 

(a)  The  bailee  must  exercise  ordinary  care  in  the  keeping 
and  use  of  the  article  and  is  liable  for  ordinary  negligence. 
Ordinary  care  is  that  which  the  average  prudent  man  exercises 
under  like  circumstances  in  the  conduct  of  his  own  affairs. 
The  bailee  is  not  liable  for  inevitable  accident  nor  for  any  will- 
ful act  of  a  third  person.  He  is  liable  only  for  negligence,  that 
is,  the  want  of  that  ordinary  care  on  his  part  which  naturally 
and  probably  results  in  injuring  the  article. 

(b)  The  bailee  acquires  the  right  to  the  exclusive  use  of 
the  article  during  the  time  specified.  He  may  maintain  an 
action  for  any  disturbance  of  his  lawful  possession  and  is  said 
to  have  a  special  property  in  the  goods.  He  must  use  the 
article  with  due  care  and  only  for  the  purpose  or  in  the  man- 
ner agreed  upon.  If  he  hires  a  horse  to  drive  to  A,  he  must 
not  drive  elsewhere  or  beyond  A.  An  intentional  material 
variation  from  the  terms  of  the  contract  may  amount  to  a 
conversion  and  render  the  bailee  absolutely  liable  for  the  safe 
return  of  the  chattel. 

Examples :  2.  A  hires  B's  horse  to  drive  to  X.  He  does  drive  to  X, 
but  by  a  very  circuitous  and  unusual  route.  This  may  be  a  technical  con- 
version and  render  A  liable  for  any  injury  to  the  horse  while  so  converted. 

3.  A  overdrives  the  horse  and  injures  it.  He  is  liable  to  B  for  want  of 
care  in  using  the  horse. 

(c)  The  bailee  is  liable  to  third  persons  for  injuries  resulting 
to  them  from  his  use  of  the  article,  in  the  same  way  as  if  it 
were  his  own.  The  bailor  is  not  liable  unless,  perhaps,  for 
some  inherent  vice  in  the  article  of  which  he  did  not  warn  the 
bailee.  Third  persons  injuring  the  article  are  liable  to  either 
the  bailor  or  the  bailee  as  their  damage  may  appear. 

Examples  :  4.  A  hires  B's  horse.  A  drives  so  negligently  that  he  injures 
C.    A  is  liable  to  C.    B  is  not  liable  to  C. 

5.  X  drives  into  the  horse  and  injures  it.  X  is  liable  to  A  to  the  extent 
that  the  injury  renders  the  horse  less  valuable  to  A,  and  to  B  for  any  per- 
manent injury  to  the  horse. 

(d)  The  bailee  is  bound  to  compensate  the  bailor.  If  the 
price  is  not  fixed  by  agreement,  a  reasonable  price  is  under- 
stood.   If  the  chattel  is  destroyed  without  fault  of  either  party 


io8  BAILMENT  [Ch.  V 

before  the  term  of  the  bailment  is  completed,  the  contract  is 
discharged,  but  the  bailor  may  recover  the  reasonable  value  of 
such  use  as  the  bailee  has  had  up  to  that  time. 

(e)  The  bailee  must  redeliver  the  chattel  at  the  termination 
of  the  bailment,  and  must  pay  any  damages  done  to  it  by  his 
negligence.  If  the  bailee  converts  the  chattel  and  the  bailor 
recovers  its  full  value,  the  absolute  title  vests  in  the  bailee 
upon  such  payment  to  the  bailor. 

Example  6.  A  hires  B's  wagon  for  two  days.  At  the  end  of  two  days 
B  demands  it  and  A  refuses  to  return  it.  (a)  B  may  replevin  it,  that  is, 
get  it  by  legal  process,  (b)  B  may  sue  in  tort  for  conversion  and  get  a 
judgment  for  the  full  value  of  the  wagon.  When  A  pays  this  judgment 
(not  before)  the  title  to  the  wagon  vests  in  A. 

67.  Bailor  engages  bailee  to  keep,  repair,  or  transport  an 
article.  In  these  bailments  there  is  always  a  contract  under 
which  the  bailee  is  to  perform  some  services  upon  the  chattel 
for  a  compensation. 

i .  Different  bailments  under  this  head.  These  bailments  are 
of  various  kinds  and  for  various  purposes.  There  are  three  dis- 
tinct types:  (a)  where  the  bailee  for  compensation  is  to  take 
care  of  the  goods  for  the  bailor,  as  a  warehouseman  stores 
and  cares  for  the  goods  of  his  customer  or  an  innkeeper  those 
of  his  guest ;  (b)  where  the  bailee  for  compensation  is  to  do 
some  work  upon  the  article,  as  a  jeweler  repairs  a  watch  or  a 
miller  grinds  grain ;  (c)  where  the  bailee  is  to  carry  or  trans- 
port goods  for  the  bailor  for  a  compensation,  as  railways  carry 
freight  or  postal  authorities  carry  letters. 

The  cases  of  innkeepers  and  common  carriers  present  peculiar 
features  and  will  be  treated  separately. 

2.  Liabilities  of  bailor.  In  addition  to  the  liabilities  of  bailors 
in  other  relations,  the  bailor  in  this  class  is  under  a  duty  to 
compensate  the  bailee.  That  the  bailee  receives  a  compensa- 
tion is  the  distinctive  characteristic  of  these  bailments.  The 
compensation  may  be  slight,  but  if  there  is  any  it  serves  to 
take  the  case  out  of  the  class  of  gratuitous  bailments.  Thus  if 
B  agrees  to  take  and  care  for  C's  horse  upon  consideration  that 


§67]  FOR  MUTUAL  BENEFIT  109 

he  may  use  it,  B  is  a  bailee  for  hire  and  is  not  a  mere  deposi- 
tary ;  he  receives  the  use  of  the  horse  as  compensation. 

Usually  the  compensation  is  fixed  by  the  contract  or  it  is 
understood  that  it  shall  be  the  reasonable  value  of  the  bailee's 
services.  When  the  bailee  has  fully  performed  he  is  entitled 
to  his  compensation,  even  though  before  the  article  is  returned 
to  the  bailor  it  should  be  destroyed,  provided  the  destruction 
is  due  to  no  fault  of  the  bailee.  If  the  article  is  destroyed 
without  his  fault  after  he  has  partly  performed  but  before  his 
contract  is  completed,  he  is  entitled  to  compensation  for  labor 
or  material  furnished  up  to  the  time  of  the  destruction  of  the 
article.  If  the  bailee  abandons  the  work  without  justification, 
many  courts  forbid  him  to  recover  any  compensation,  but  some 
permit  a  recovery  for  the  services  less  the  damages  to  the 
bailor  arising  from  the  breach.  So  if  the  bailee  does  the  work 
unskillfully,  but  it  is  of  some  value,  he  may  recover  its  value 
less  the  damages  to  the  bailor. 

Examples :  1 .  B  runs  a  store.  He  permits  packages  to  be  left  there  to 
be  taken  by  a  local  expressman.  A  package  for  C  is  left  there  tc  be  taken 
by  the  expressman,  and  when  called  for  cannot  be  found.  C  sues  B,  who 
contends  he  was  a  gratuitous  bailee  and  liable  only  for  gross  negligence. 
The  judge  tells  the  jury  that  B  is  not  a  bailee  for  hire  unless  he  is  to  receive 
some  certain  benefit,  —  that  an  uncertain,  contingent  benefit  in  drawing  cus- 
tom to  his  store  is  not  enough.  On  appeal  the  court  held  this  was  error. 
The  nature  and  amount  of  compensation  are  immaterial.  The  law  will  not 
inquire  whether  it  is  adequate,  nor  in  such  a  case  whether  it  is  certain. 
It  is  enough  that  B  derives  some  compensation.  (But  note  that  in  this  case 
C  is  under  no  obligation  to  pay  B  anything.) 

2.  C  agrees  to  work  as  bailee  on  B's  chattel.  After  beginning  the  work, 
but  before  completing  it,  he  stops  and  refuses  to  go  on.  Can  he  recover 
anything?  Many  courts  say  he  cannot  because  he  has  committed  a  breach. 
Some  allow  him  to  recover  the  reasonable  value  of  his  services,  less  the 
damages  to  the  bailor  from  delay  in  the  completion  of  the  work. 

3 .  Rights  and  liabilities  of  bailee.  These  are  often  regulated, 
at  least  in  part,  by  contract.  Where  the  contract  is  silent  the 
following  rules  apply. 

(a)  The  bailee  is  bound  to  exercise  ordinary  care  and  dili- 
gence and  is  liable  for  ordinary  negligence ;  but  the  standard 


I  IO 


BAILMENT  [Ch.  V 


of  liability  is  different  in  the  case  of  innkeepers  and  common 
carriers.  If  the  bailee  undertakes  to  perform  work  requiring 
skill,  as  in  the  case  of  a  watch  repairer,  he  is  bound  to  possess 
and  exercise  the  skill  ordinarily  possessed  by  those  engaged  in 
the  occupation. 

(b)  The  bailee  has  a  temporary,  special  property  in  the  chat- 
tel, and  may  protect  this  by  insurance  and  by  appropriate  action 
against  third  persons  who  interfere  with  his  possession. 

(c)  The  bailee  has  a  lien  upon  the  chattel  for  his  reasonable 
charges  for  storage  or  for  services.  The  only  bailees  in  this 
class  who  were  excepted  at  common  law  were  agisters  who 
pastured  cattle  and  livery-stable  keepers  who  cared  for  them, 
but  statutes  have  generally  extended  the  lien  in  favor  of  these 
bailees.  At  common  law  the  lien  was  merely  possessory  and 
was  accompanied  by  no  power  to  sell ;  but  the  power  of  sale  to 
enforce  the  lien  is  now  quite  generally  conferred  by  statute. 

Warehousemen.  A  warehouseman  is  one  who  receives  and  stores  goods 
for  compensation.  The  warehouseman  usually  gives  a  "  warehouse  receipt  " 
for  goods  received  by  him.  These  receipts  may  be  transferred  by  indorse- 
ment so  as  to  give  the  indorsee  a  right  upon  presenting  the  receipt  to  claim 
the  goods.  Grain  stored  in  warehouses  is  transferred  by  merely  indorsing 
and  transferring  the  warehouse  receipts.  Usually  such  grain  is  mixed  with 
like  grain  of  other  bailors,  and  the  receipt  entitles  the  owner  to  the  specified 
number  of  bushels  from  the  common  mass.  In  the  absence  of  contract  or 
custom  the  bailee  has  no  right  to  confuse  the  bailor's  goods  with  those  of 
others,  and  if  he  does  so  and  loss  ensues,  he  must  make  good  the  loss.  If 
he  confuses  a  bailor's  goods  with  his  own,  he  will  suffer  whatever  loss  or 
inconvenience  arises,  even  to  the  extent  of  losing  his  own  goods  altogether. 
If  the  goods  are  injured  or  lost,  it  is  incumbent  upon  the  warehouseman  to 
account  for  the  injury.  If  he  pleads  a  fire  or  theft  or  the  like,  the  bailor 
must  then  show  that  the  fire  or  theft  was  due  to  the  negligence  of  the  ware- 
houseman. United  States  bonded  warehouses  are  regulated  by  statute 
(U.S.  Revised  Statutes,  §§  2954-3008).  They  are  for  the  convenience  of 
importers  or  others  required  to  pay  duties  or  excise  taxes,  and  goods  are 
kept  in  them  in  bond  until  such  taxes  are  paid. 

Wharfingers.  Wharfingers  are  those  who  maintain  wharves  for  the  pur- 
pose of  receiving  goods  and  keeping  them  for  compensation.  They  are  a 
special  kind  of  warehousemen. 

Safe-deposit  companies.  If  one  rents  a  safe-deposit  box  in  a  bank  or  in 
the  vaults  of  a  safe-deposit  company,  is  the  bank  or  the  company  a  bailee  of 


§  68]  INNKEEPERS  1 1 1 

the  articles  stored  in  the  box?  Probably  not,  in  the  ordinary  sense  of  that 
term.  The  company  never  has  possession  of  the  contents  of  the  box.  The 
one  who  hires  the  box  puts  the  articles  in  it,  locks  it,  and  keeps  the  key. 
The  company  for  added  security  has  another  key,  without  the  use  of  which 
the  box  cannot  again  be  opened.  Neither  key  alone  will  open  the  box  ; 
both  must  be  used.  The  situation  is  like  bailment  but  does  not  fully  corre- 
spond to  it.  The  company  is  liable  for  breach  of  contract  in  permitting 
any  unauthorized  person  to  open  the  box,  and  is  bound  to  use  due  diligence 
to  guard  the  box  and  its  contents.  While  the  courts  sometimes  speak  of 
these  transactions  as  bailments,  there  is  a  material  difference  between  them 
and  ordinary  bailments  in  that  there  is  no  actual  delivery  of  the  goods  to 
the  company. 

Banks.  When  money  is  deposited  in  a  bank  the  relation  is  that  of  debtor 
and  creditor,  not  that  of  bailor  and  bailee.  One  may,  however,  make  a 
deposit  as  bailor.  Such  would  be  the  case  where  one  deposits  a  bag  of 
gold,  the  same  identical  money  to  be  returned  to  him. 


III.   Special  Cases  of  Bailment  for  Keeping  or 
Transportation 

68.  Innkeepers.  The  relation  of  an  innkeeper  to  his  guests, 
and  particularly  toward  the  goods  of  his  guests,  is  peculiar,  and 
is  the  result  of  a  state  of  society  now  largely  outgrown. 

i.  Who  are  innkeepers.  An  innkeeper  or  hotel  keeper  is  one 
who  holds  himself  out  to  the  public  as  ready  to  entertain  trav- 
elers or  transients  as  guests  for  a  compensation,  furnishing  food 
and  lodging,  or  lodging  alone.  A  restaurant  is  not  an  inn, 
because  it  furnishes  only  food.  A  lodging  house  is  not  an 
inn,  because  the  keeper  is  not  bound  to  entertain  any  who 
apply,  and  makes  a  special  contract  with  each.  An  innkeeper, 
as  to  some  of  his  permanent  guests,  may  be  rather  a  lodging- 
house  keeper  or  a  boarding-house  keeper  than  strictly  an  inn- 
keeper. A  steamer  providing  lodging  and  food  for  passengers 
has  been  treated  as  to  those  so  entertained  as  a  floating  inn, 
but  there  is  strong  authority  to  the  contrary.  A  sleeping  car, 
on  the  other  hand,  is  held  not  to  be  an  inn.  These  distinctions 
are  very  nice  and  not  always  satisfactory. 

2.  Who  are  guests.  A  guest  at  an  inn  or  hotel  is  a  transient 
who  receives  accommodations  at  it  under  a  contract,  express  or 


H2  BAILMENT  [Ch.  V 

implied,  with  the  proprietor.  One  who  lives  regularly  or  per- 
manently at  a  hotel  is  not  a  guest  in  the  legal  sense  of  the 
term.  But  one  may  engage  accommodations  for  a  definite 
period,  longer  or  shorter,  without  ceasing  to  be  a  guest,  pro- 
vided he  is  still  a  wayfarer  or  transient  and  not  a  resident. 
The  transient  may  be  a  traveler  or  one  who  resides  in  the  place 
where  the  inn  is  located.  The  taking  of  lodgings  is  not  neces- 
sary to  make  the  patron  a  guest.  A  traveler  who  resorts  to  an 
inn  for  food  or  drink  may  be  a  guest.  He  may  even  become  a 
guest  at  the  railway  station  and  there  put  his  baggage  in  charge 
of  the  hotel  porter. 

Examples :  i.  B's  family  reside  in  X,  but  B  lives  in  Y  and  visits  X 
only  occasionally.  The  family  engage  permanent  accommodations  at  a  hotel. 
B  visits  them  there  and  remains  at  the  hotel  for  a  month.  B's  watch  and 
his  wife's  jewels  are  stolen.  B  is  a  guest  and  the  innkeeper  is  liable  to  him 
for  the  loss  of  the  watch.  His  wife  is  not  a  guest  and  cannot  recover  for 
her  jewelry. 

2.  B  goes  to  a  hotel  and  registers,  but  does  not  take  a  room.  He  goes 
to  the  dining  room,  leaving  his  hand  bag  in  the  custody  of  a  porter.  It  is 
stolen.  The  innkeeper  is  liable.  The  taking  of  a  room,  however,  is  a  quite 
decisive  test. 

3.  Rights  and  liabilities   of  an    innkeeper.    These   differ   in'' 
several  particulars  from  those  of  other  bailees. 

(a)  An  innkeeper  is  bound  to  receive  all  fit  and  orderly 
guests  if  he  has  accommodations  for  them.  His  refusal  to  do 
so  may  render  him  liable  to  an  action  for  damages,  or  to  a 
criminal  prosecution,  or  both.  Ordinary  bailees  may  choose 
with  whom  they  will  deal,  but  an  innkeeper  is  following  a 
public  calling  and  must  serve  all  members  of  the  public  alike. 
The  innkeeper  must  receive  the  baggage  of  the  traveler  also. 

(b)  At  common  law  an  innkeeper  is  absolutely  liable  for  the 
loss  of  his  guest's  goods  in  the  inn,  unless  such  loss  was  due  tffj 
an  act  of  God,  to  an  act  of  the  public  enemy,  or  to  the  fault  of' 
the  guest.  He  is  thus  practically  an  insurer  of  the  safety  of, 
the  goods,  —  and  especially  against  theft, — a  liability  which 
does  not  attach  to  bailees  generally.  This  rule  originated  in 
early  times  when  robbers  infested  the  routes  of  travel,  and 
was   intended   to    protect   the   guest    from    collusion    between 


§69]  COMMON  CARRIERS  OF  GOODS 


113 


them  and  the  innkeepers.  Modern  statutes  have  to  some 
extent  relieved  the  innkeeper  from  this  high  degree  of  liability 
by  providing  that  if  he  posts  notices  that  he  has  a  safe  in  which 
valuables  may  be  deposited  he  shall  not  be  liable  for  those 
retained  by  the  guest.  Whether  "valuables"  includes  reason- 
able pocket  money  or  a  watch  has  been  differently  decided,  but 
in  New  York  it  is  held  that  these  are  included,  and  that  if  a 
guest  retains  them  he  does  so  at  his  own  risk. 

While  the  common  law  rule  of  liability  stated  above  is  the  one  quite 
generally  adopted,  it  has  not  gone  without  dispute.  Indeed  three  different 
rules  have  been  applied:  (1)  the  strict  rule  given  above,  that  the  innkeeper 
•is  an  insurer,  with  the  exceptions  noted  ;  (2)  that  the  innkeeper  may  excuse 
himself  by  showing  inevitable  accident  or  irresistible  force,  though  not 
amounting  to  an  act  of  God  or  the  public  enemy,  as  fire  or  robbery ; 
(3)  that  the  innkeeper  may  excuse  himself  by  showing  that  he  was  free  from 
negligence.  Many  statutes  have  expressly  relieved  the  innkeeper  of  liability 
for  loss  not  due  to  his  negligence.  (For  the  meaning  of  "  act  of  God  "  see 
sec.  69,  p.  115,  post.) 

The  innkeeper  is  also  bound  to  use  due  care  to  protect  guests  from  assaults 
or  insults,  and  especially  those  proceeding  from  the  servants  of  the  inn. 

(c)  The  innkeeper  has  a  lien  upon  the  baggage  of  his  guest 
for  the  amount  of  the  guest's  bill.  At  common  law  he  had  no 
power  to  sell  the  goods  in  order  to  enforce  the  lien,  but  such 
power  is  now  generally  conferred  by  statute. 

4.  Innkeeper  as  ordinary  bailee.    An  innkeeper  is  an  ordinary 

bailee  of  goods  brought  to  the  inn  by  a  guest  for  show  or  sale, 

of  the  goods  of  boarders,  and  of  goods  held  by  him  under  a  lien. 

He  may  be  a  gratuitous  bailee  of  goods  left  by  one  not  a  guest 

.  or  left  for  an  unreasonable  time  by  one  who  has  ceased  to  be 

I  a  guest. 

69.  Common  carriers  of  goods.  No  other  bailee  for  mutual 
benefit  undertakes  so  high  a  degree  of  liability  as  a  common 
carrier  of  goods,  although  by  special  contract  the  carrier  now 
usually  avoids  the  extreme  liability  fixed  by  the  common  law. 

1.  Who  are  common  earners.  A  common  carrier  is  one  who, 
in  the  exercise  of  a  public  calling,  undertakes  to  transport 
for  a  compensation  the  property  of  any  person  who  may  apply. 

private  carrier  is  one  who  so  transports  goods  under  special 


101 
A 


ii4 


BAILMENT 


[Ch.  V 


contract  without  being  engaged  in  the  business  as  a  public 
employment.  A  common  carrier  holds  himself  out  as  ready  to 
serve  all  persons  indifferently  to  the  extent  of  his  ability.  In 
this  respect  he  is  like  the  innkeeper.  Railways,  steamboats, 
canal  boats,  express  companies,  stages,  and  the  like,  so  far  as 
they  carry  goods,   are  common  carriers. 

2.  Liabilities.  Two  things  distinguish  the  liabilities  of  com- 
mon carriers  from  those  of  private  carriers  and  most  other 
bailees  :  first,  they  are  liable  for  wrongfully  refusing  to  receive 
and  transport  goods  ;  second,  they  are  insurers  of  goods  against 
all  loss  or  damage,  except  such  as  may  be  occasioned  by  the 
act  of  God,  or  of  the  public  enemy,  or  of  public  authority,  or  of 
the  shipper  himself. 

First.  The  duty  to  carry  for  all  indifferently  arises  from  the 
public  or  quasi-public  nature  of  the  calling.  A  refusal  to  carry 
up  to  the  limit  of  his  facilities  may  render  a  common  carrier 
liable  in  damages,  or  he  may  be  compelled  by  the  courts  to 
perform  the  duty  specifically.  Dangerous  goods,  or  goods  other 
than  those  which  the  carrier  professes  to  carry,  may  be  law- 
fully refused.  Carriers,  like  railways,  which  enjoy  special  fran- 
chises, as  rights  of  way  or  the  power  to  condemn  lands  for  a 
right  of  way,  may  be  compelled  to  supply  reasonably  sufficient 
facilities,  but  carriers  not  enjoying  such  special  privileges  can- 
not be  compelled  to  supply  greater  facilities  than  they  choose. 
The  duty  to  carry  for  all  indifferently  implies  the  duty  not  to 
discriminate  between  customers  by  giving  any  preference  to  the 
goods  of  one  over  those  of  another,  or  by  charging  one  shipper 
more  than  a  reasonable  rate  while  carrying  for  another  at  a 
reasonable  rate.  A  carrier  might,  however,  unless  prevented  by 
statute,  carry  for  one  at  less  than  a  reasonable  rate,  provided  he 
carried  for  others  at  a  reasonable  rate.  There  exist  in  most 
states  statutes  governing  the  rates  to  be  charged  by  common 
carriers  for  transportation  beginning  and  ending  within  a  state  ; 
and  the  federal  Congress  has  enacted  a  similar  statute,  known 
as  the  Interstate  Commerce  Act,  providing  a  method  for  regu- 
lating the  rates  to  be  charged  for  transportation  from  one  state 
to  another. 


§69]  COMMON  CARRIERS  OF  GOODS  1 15 

Second.  The  liability  for  loss  or  damage  is  very  great.  In  the 
absence  of  contract  to  the  contrary,  or  of  statutory  modification, 
a  common  carrier  is  liable  absolutely  for  all  loss  or  damage  to 
the  goods  in  his  hands  as  common  carrier,  except  as  follows  : 

(a)  The  carrier  is  not  liable  for  loss  occasioned  by  an  act  of 
God,  that  is,  by  some  force  of  nature  beyond  the  control  of  man 
and  unconnected  with  any  human  agency.  Lightning,  extraor- 
dinary floods,  cyclones,  and  the  like  are  regarded  as  acts  of 
God.  Fire  unless  occasioned  by  lightning  is  not.  Accident  is 
not,  unless  it  be  what  is  termed  inevitable  accident.  Even  if 
the  loss  is  due  to  an  act  of  God,  the  carrier  may  be  liable  if  the 
loss  is  related  proximately  to  some  negligence  of  his. 

Examples:  1.  The  carrier  negligently  delays  goods  at  X,  where  there  is 
known  to  be  danger  of  a  flood.  Even  if  the  goods  are  destroyed  by  an 
extraordinary  flood,  the  negligence  in  delaying  them  there  may  render  the 
carrier  liable. 

2.  A  steam  boiler  explodes  without  any  known  cause  and  injures  a 
shipper's  goods.    The  carrier  is  liable. 

3.  Lightning  sets  fire  to  a  freight  car  and  destroys  its  contents.  The 
carrier  is  not  liable. 

4.  A  fire  breaks  out  from  causes  unknown  and  destroys  freight.  The 
carrier  is  liable. 

(b)  The  carrier  is  not  liable  for  loss  or  damage  occasioned  by 
the  public  enemy,  that  is,  by  an  organized  military  force  making 
war  upon  the  country  of  the  carrier,  or  by  pirates  on  the  high 
seas.  Mobs,  rioters,  strikers,  and  the  like  are  not  regarded  as 
oublic  enemies  within  this  exception.  The  carrier  is  liable  for 
ioss  by  theft.  If  he  negligently  exposes  the  goods  to  the  risk 
of  destruction  by  the  public  enemy,  when  he  could  take  a  safer 
route,  he  will  be  liable  for  the  loss. 

(c)  The  carrier  is  not  liable  for  losses  due  to  the  fault  of  the 
shipper. 

Exainples:  1.  The  shipper  improperly  packs  breakable  goods,  as  china, 
and  they  are  injured  in  transit.    The  carrier  is  not  liable. 

2.  The  shipper  conceals  money  in  a  box  of  ordinary  freight  and  it  is  lost. 
The  carrier  is  not  liable  for  the  loss  of  the  money,  because  he  is  entitled  to 
be  advised  of  the  value  of  the  goods  in  order  that  he  may  take  necessary 
precautions. 


Il6  BAILMENT  [Ch.  V 

(,/)  The  carrier  is  not  liable  for  any  loss  or  damage  due  to 
the  intervention  of  some  lawful  public  authority,  as  where  goods 
are  taken  from  him  by  health  officers  or  by  seizure  under  legal 
process. 

(e)  The  carrier  is  not  liable  for  loss  or  damage  due  to  the 
inherent  nature  or  infirmity  of  the  goods. 

Example.  The  carrier  is  not  liable  for  the  decay  of  fruit  unless  he  has 
negligently  delayed  it  in  transit.  He  is  not  liable  for  the  death  of  stock  due 
to  "disease  or  fright,  unless  such  death  can  be  proximately  traced  to  some 
negligence  of  his. 

In  any  case  the  carrier  is  liable  for  his  own  negligence  to  the 
same  extent  as  any  bailee  for  hire.  He  is  liable  for  deviations 
or  delays  resulting  in  loss  if  due  to  his  negligence. 

3.  Modifications  of  liability  by  contract  or  statute.  A  com- 
mon carrier  may,  unless  forbidden  by  statute  to  do  so,  contract 
with  the  shipper  to  limit  his  liability  to  that  of  an  ordinary 
bailee ;  that  is,  he  may  contract  against  liability  as  an  insurer. 
The  rule  that  he  should  insure  the  safety  of  the  goods  was 
intended  to  protect  the  shipper  against  collusion  between  the 
carrier  and  highwaymen  or  other  robbers.  The  reason  for  the 
rule  has  practically  disappeared,  and  therefore  the  courts  uphold 
contracts  which  abrogate  the  rule  so  far  as  they  are  reason- 
able or  not  contrary  to  public  policy. 

Carriers  have  also  sought  to  contract  against  their  own  negli- 
gence or  that  of  their  employees,  that  is,  against  the  liability 
fixed  for  an  ordinary  bailee.  This  most  courts  have  refused  to 
permit  them  to  do,  upon  the  ground  that  it  is  contrary  to  public 
policy.  England  and  New  York  permit  it,  although  even  there 
the  shipper  is  entitled,  upon  the  payment  of  a  higher  rate,  to 
have  his  goods  carried  without  such  a  limited-liability  contract. 

In  some  jurisdictions  statutes  modify  the  common  law  lia- 
bility of  carriers  in  some  particulars,  for  example  by  exempting 
the  carrier  from  loss  or  damage  by  fire  not  due  to  the  negli- 
gence of  the  carrier. 

Contracts  sometimes  limit  the  amount  of  liability  to  a  sum  fixed  by  the 
shipper  as  the  value  of  his  goods.  These  are  generally  upheld  on  the  ground 
that  if  the  value  is  greater  than  that  fixed  the  carrier  is  entitled  to  greater 
compensation  for  the  added  risk. 


§69]  COMMON  CARRIERS  OF  GOODS  117 

Contracts  also  often  require  claims  for  loss  or  damage  to  be  presented 
within  a  stated  time,  and  if  the  time  allowed  is  reasonable  these  are  also 
upheld. 

The  consideration  of  these  contracts  is  usually  that  the  carrier  will 
transport  the  goods  at  a  lower  rate  than  that  charged  where  his  liability  is 
that  fixed  by  the  common  law.  (For  the  contract  usually  made  see  the 
uniform  bill  of  lading  conditions,  post.} 

A  mere  notice  not  brought  to  the  attention  of  the  shipper  cannot  oper- 
ate to  limit  the  carrier's  liability.  But  a  notice  in  a  bill  of  lading,  express 
receipt,  and  the  like  is  presumed  to  be  assented  to  by  the  shipper  who 
receives  it  if  it  is  delivered  to  him  before  the  goods  are  beyond  recall.  This 
rule  does  not  apply  to  a  local  baggage  carrier  who  gives  a  receipt  for  bag- 
gage, because  custom  has  not  made  such  receipts  evidence  of  a  contract. 
Nor  does  the  rule  apply  to  the  ordinary  railway  ticket.  In  such  cases  it 
must  be  shown  that  the  person  receiving  the  token  or  ticket  actually  saw  or 
knew  of  the  notice  when  he  took  the  receipt  or  purchased  the  ticket. 

4.  When  liability  ends.  Liability  as  carrier  ends  when  the 
goods  are  delivered  to  the  consignee,  or  when  after  notice  the 
consignee  leaves  the  goods  an  unreasonable  time  in  the  hands 
of  the  carrier.  In  the  latter  case  the  carrier  ceases  to  be  liable 
as  carrier  and  becomes  liable  as  warehouseman.  In  many- 
states  a  railway  carrier  becomes  merely  a  warehouseman,  with- 
out notice  to  the  consignee,  when  the  goods  arrive  at  their 
destination  and  are  unloaded  into  the  railway  freight  house. 

Liability  also  ends  when  a  carrier,  having  received  goods  to 
be  transported  over  its  own  and  connecting  lines,  has  delivered 
the  goods  to  a  connecting  carrier,  unless  the  first  carrier  has 
contracted  to  transport  the  goods  to  their  final  destination. 

By  merely  accepting  goods  billed  to  a  point  beyond  its  own  line,  a  carrier 
does  not  contract  to  be  liable  after  the  goods  leave  its  hands;  there  must 
be  something  in  the  contract  to  that  effect.  This  is  the  general  American 
doctrine ;  but  in  England  and  a  few  of  our  states  it  is  held  that  a  railway 
accepting  goods  billed  beyond  its  line  impliedly  undertakes  to  deliver  them 
at  their  final  destination  and  is  therefore  liable  for  loss  occurring  upon  a 
connecting  line.  If  the  first  carrier  takes  prepayment  for  the  whole  transit, 
or  in  the  bill  of  lading  agrees  "to  forward,"  or  uses  like  expressions  indica- 
tive of  an  agreement  to  deliver  at  the  final  destination,  a  contract  for  the 
whole  transportation  may  be  implied.  If  the  first  carrier  is  not  made  liable 
by  its  contract,  the  shipper  must  recover  against  the  carrier  that  causes  the 
loss  or  damage.  But  goods  found  damaged  in  the  hands  of  a  railway 
company  are  presumed  to  have  been  damaged  by  that  company. 


H8  BAILMENT  [Ch.  V 

5.  Delivery.  The  carrier  must  deliver  the  goods  to  the  con- 
signee or  a  connecting  carrier  or  pay  damages  for  nondelivery, 
unless  (a)  they  are  claimed  by  one  whose  title  is  superior,  as 
by  a  true  owner  whose  goods  have  been  converted,  or  (b) 
the  consignor  has  exercised  the  right  of  stoppage  in  transitu 
(see  p.  88  ante),  or  (e)  they  have  been  lost  from  a  cause  for 
which  the  carrier  is  not  liable.  If  the  carrier  delivers  to  the 
wrong  person  he  is  liable  for  conversion.  The  carrier  must 
use  due  diligence  to  notify  the  consignee  of  the  arrival  of 
the  goods. 

6.  Bills  of  lading,  etc.  A  bill  of  lading  is  the  written  receipt 
by  a  carrier  for  goods  delivered  to  the  carrier  for  transportation, 
and  an  agreement  to  transport  and  deliver  them  to  a  person 
named  therein  or  to  his  order.  It  is  signed  by  an  agent  of  the 
owner  of  the  vessel,  railroad,  or  other  transportation  agency. 

A  charter  party  is  a  contract  of  affreightment  in  writing,  by 
which  the  owner  of  a  vessel  lets  the  whole  or  a  part  of  her  to  a 
person  for  the  transportation  of  goods  for  a  particular  voyage, 
in  consideration  of  the  payment  of  freight  charges.  A  charter 
party  may  leave  the  possession  and  control  of  the  vessel  with 
the  owner,  or  may  transfer  the  possession  and  control  to  the 
freighter. 

With  the  growth  of  commerce  and  the  increase  of  carriers  it 
has  been  found  advantageous  to  have  a  uniform  bill  of  lading. 
Railway  companies  therefore  united  in  adopting  one  which  is 
now  generally  in  use.  Shippers  when  once  familiar  with  it 
need  not  scrutinize  each  one  in  order  to  ascertain  whether  it 
contains  some  new  term.  Like  the  standard  fire-insurance 
policy  it  brings  uniformity  into  an  everyday  transaction  and 
contract  ;  but,  unlike  that,  it  is  the  result  of  voluntary  agree- 
ment and  not  of  statutory  enactment. 

A  shipping  order  is  also  used  as  a  part  of  the  uniform  bill  of 
lading  forms.  This  is  an  order  signed  by  the  shipper  and 
addressed  to  the  carrier,  directing  him  to  receive  and  carry  the 
goods.    It  contains  the  same  conditions  as  the  bill  of  lading. 

There  are  also  in  use  a  uniform  export  bill  of  lading  and  a 
uniform  live  stock  bill   of  lading;. 


69] 


COMMON  CARRIERS  OF  GOODS 


119 


Lackawanna 
1  ftolroad' 


BILL  OF  LADING. 


The  Delaware,  Lackawanna  &.  Western  Railroad  Co. 


RECEIVED,  subject  to  the  classificatu 


1  the  date  or  issue  of  this  Bill  of  Lading, 


tions  od  back  he 


s  of  packages  unkno* 
nd  des.ii  cation,  if  oo  us  mad.  otherwise  to  deliver  to  another  carrier  od  the  route  to  said  destination, 
deration  of  the  rate  of  freigot  hereinafter  named,  as  to  each  carrier  of  all.»ranvOf  said  p'operty  over 
oeach  party  at  anytime  interested  in  all  or  aoy  of  said  property,  that  every 


S. 


Consigns 


£, 


/y  A^A*.  s# 


<2£j<. 


e^_ 


County. 


DESCRIPTION   OF  ARTICLES. 


't?-<P  <VrtT>lTH   S£^i=cJ^L. 


£&L 


B.m.  ts  L.flJ- 


m  Jt^e^-^  rC*-SC~ 


Charges  Advanced,  $- 


'^2  -di^irtx^ 


Jij&Q_ 


STAMP 
HERE. 


The  blank  1 


not  be  filled  1 


The  rate  of  freight  from ^1 

/Op 

to t    'Itii  /VifMl 


TCZI<. 


First  Class      {       -— Third/Class- 
First  Class  .      ■  ■*■■      Fourth  Class- 


1  cents  per  100  pounds 
— Siith    Class 


-Special  Class 


ilKnatunefth^Areni  ban  >ckoo«U4ces  oaly  it?  i»u  (Ha  J 


Received  $_ 


to  epply  In  prepayment  of  the 
charges  on  the  property  described 
above. 


35: 


=1-2 

S2.?tD 

=• »  n 


tu 


The  words  "not  negotiable"  are  printed  on  the  face  of  each  uniform  bill  of 
lading  for  the  protection  of  carriers  under  certain  state  laws.  They  are 
sometimes  omitted  where  they  interfere  with  the  obtaining  by  the  shipper 
of  advances  upon  the  bill  of  lading. 


Uniform  Bill  of  Lading  Conditions 


I.  No  carrier  or  party  in  posses- 
sion of  all  or  any  of  the  property 
herein  described  shall  be  liable  for 
any  loss  thereof  or  damage  thereto, 
by  causes  beyond  its  control  ;  or  by 
floods  or  by  fire  ;  or  by  quarantine  ; 
or  by  riots,  strikes,  or  stoppage  of 
labor ;  or  by  leakage,  breakage, 
chafing,  loss  in  weight,  changes  in 


weather,  heat,  frost,  wet,  or  decay ; 
or  from  any  cause  if  it  be  necessary 
or  is  usual  to  carry  such  property 
upon  open  cars. 

2.  No  carrier  is  bound  to  carry 
said  property  by  any  particular  train 
or  vessel,  or  in  time  for  any  particular 
market,  or  otherwise  than  with  as 
reasonable  dispatch   as    its   general 


120 


BAILMENT 


[Ch.  V 


business  will  permit.  Every  carrier 
shall  have  the  right,  in  case  of  neces- 
sity, to  forward  said  property  by  any 
railroad  or  route  between  the  point 
of  shipment  and  the  point  to  which 
the  rate  is  given. 

3.  No  carrier  shall  be  liable  for  loss 
or  damage  not  occurring  on  its  own 
road  or  its  portion  of  the  through 
route,  nor  after  said  property  is 
ready  for  delivery  to  the  next  carrier 
or  to  consignee.  The  amount  of  any 
loss  or  damage  for  which  any  carrier 
becomes  liable  shall  be  computed 
at  the  value  of  the  property  at  the 
place  and  time  of  shipment  under 
this  bill  of  lading,  unless  a  lower 
value  has  been  agreed  upon  or  is 
determined  by  the  classification  upon 
which  the  rate  is  based,  in  either  of 
which  events  such  lower  value  shall 
be  the  maximum  price  to  govern 
such  computation.  Claims  for  loss 
or  damage  must  be  made  in  writing 
to  the  agent  at  point  of  delivery 
promptly  after  arrival  of  the  prop- 
erty, and  if  delayed  for  more  than 
thirty  days  after  the  delivery  of  the 
property,  or  after  due  time  for  the 
delivery  thereof,  no  carrier  hereunder 
shall  be  liable  in  any  event.  [Any 
carrier  or  party  liable  on  account  of 
loss  or  damage  to  any  of  said  prop- 
erty shall  have  the  full  benefit  of 
any  insurance  that  may  have  been 
effected  upon  or  on  account  of  said 
property.]1 

4.  All  property  shall  be  subject 
to  necessary  cooperage  and  bailing 
at  owner's  cost.  Each  carrier  over 
whose  route  cotton  is  to  be  carried 
hereunder,  shall  have  the  privilege, 


at  its  own  cost,  of  compressing  the 
same  for  greater  convenience  in  han- 
dling and  forwarding,  and  shall  not 
be  held  responsible  for  deviation  or 
unavoidable  delays  in  procuring  such 
compression.  Grain  in  bulk  con- 
signed to  a  point  where  there  is  an 
elevator  may  (unless  otherwise  ex- 
pressly noted  herein,  and  then  if  it 
is  not  promptly  unloaded)  be  there 
delivered  and  placed  with  other  grain 
of  same  kind,  without  respect  to 
ownership,  and  if  so  delivered  shall 
be  subject  to  a  lien  for  elevator 
charges  in  addition  to  all  other 
charges  hereunder.  No  carrier  shall 
be  liable  for  differences  in  weights 
or  for  shrinkage  of  any  grain  or  seed 
carried  in  bulk. 

5.  Property  not  removed  by  the 
person  or  party  entitled  to  receive 
it  within  twenty-four  hours  after  its 
arrival  at  destination  may  be  kept  in 
the  car,  depot,  or  place  of  delivery 
of  the  carrier,  at  the  sole  risk  of  the 
owner  of  said  property  ;  or  may  be, 
at  the  option  of  the  carrier,  removed 
and  otherwise  stored  at  the  owner's 
risk  and  cost  and  there  held  subject 
to  lien  for  all  freight  and  other 
charges.  The  delivering  carrier  may 
make  a  reasonable  charge  per  day 
for  the  detention  of  any  vessel  or  car 
and  for  use  of  track  after  the  car  has 
been  held  forty-eight  hours  for  load- 
ing or  unloading,  and  may  add  such 
charge  to  all  other  charges  hereunder, 
and  hold  said  property  subject  to  a 
lien  therefor.  Property  destined  to 
or  taken  from  a  station  at  which  there 
is  no  regularly  appointed  agent  shall 
be  entirely  at  risk   of  owner  when 


1  The  portion  in  brackets  may  be  omitted  by  any  carrier. 


§69] 


COMMON  CARRIERS  OF  GOODS 


121 


unloaded  from  cars,  or  until  loaded 
into  cars  ;  and  when  received  from 
or  delivered  on  private  or  other  sid- 
ings, shall  be  at  owner's  risk  until 
the  cars  are  attached  to,  and  after 
they  are  detached  from,  trains. 

6.  No  carrier  hereunder  will  carry, 
or  be  liable  in  any  way  for,  any  docu- 
ments, specie,  or  for  any  article  of 
extraordinary  value  not  specifically 
rated  in  the  published  classifications, 
unless  a  special  agreement  to  do  so, 
and  a  stipulated  value  of  the  articles, 
are  indorsed  hereon. 

y.  Every  party,  whether  princi- 
pal or  agent,  shipping  inflammable, 
explosive,  or  dangerous  goods  with- 
out previous  full  written  disclosure 
to  the  carrier  of  their  nature  shall 
be  liable  for  all  loss  or  damage 
caused  thereby,  and  such  goods  may 
be  warehoused  at  owner's  risk  and 
expense  or  destroyed  without  com- 
pensation. 

8.  Any  alteration,  addition,  or 
erasure  in  this  bill  of  lading  which 
shall  be  made  without  the  special 
notation  hereon  of  the  agent  of  the 
carrier  issuing  this  bill  of  lading 
shall  be  void. 

9.  If  the  word  "  Order"  is  written 
hereon  immediately  before  or  after 
the  name  of  the  party  to  whose  order 
the  property  is  consigned,  without 
any  condition  or  limitation  other  than 
the  name  of  a  party  to  be  notified  of 
the  arrival  of  the  property,  the  sur- 
render of  this  bill  of  lading  properly 
indorsed  shall  be  required  before 
the  delivery  of  the  property  at  desti- 
nation.1 If  any  other  than  the  afore- 
said form    of    consignment   is   used 


herein,  the  said  property  may,  at  the 
option  of  the  carrier,  be  delivered 
without  requiring  the  production  or 
surrender  of  this  bill  of  lading. 

10.  Owner  or  consignee  shall  pay 
freight  at  the  rate  herein  stated,  and 
all  other  charges  accruing  on  said 
property,  before  delivery,  and  ac- 
cording to  weights  as  ascertained 
by  any  carrier  hereunder ;  and  if 
upon  inspection  it  is  ascertained  that 
the  articles  shipped  are  not  those 
described  in  this  bill  of  lading,  the 
freight  charges  must  be  paid  upon 
the  articles  actually  shipped,  and  at 
the  rates  and  under  the  rules  provided 
for  by  published  classifications. 

11.  If  all  or  any  part  of  said 
property  is  carried  by  water  over 
any  part  of  said  route,  such  water 
carriage  shall  be  performed  subject 
to  the  conditions,  whether  printed  or 
written,  contained  in  this  bill  of  lad- 
ing, including  the  condition  that  no 
carrier  or  party  shall  be  liable  for 
any  loss  or  damage  resulting  from 
the  perils  of  the  lakes,  sea,  or  other 
waters  ;  or  from  explosion,  bursting 
of  boilers,  breakage  of  shafts,  or  any 
latent  defect  in  hull,  machinery,  or 
appurtenances ;  or  from  collision, 
stranding,  or  other  accidents  of  navi- 
gation ;  or  from  the  prolongation  of 
the  voyage.  And  any  vessel  carry- 
ing any  or  all  of  the  property  herein 
described  shall  have  liberty  to  call 
at  intermediate  ports  ;  to  tow  and 
be  towed,  and  to  assist  vessels  in 
distress,  and  to  deviate  for  the  pur- 
pose of  saving  life  or  property.  [And 
any  carrier  by  water,  liable  on  ac- 
count of  loss  of  or  damage  to  any 


1  This  is  often  printed  on  the  face  of  the  bill,  as  it  is  an  important  stipulation. 


I22  BAILMENT  [Ch.  V 

of  said  property,  shall  have  the  full      have    been    effected    upon    or    on 
benefit  of  any  insurance  that  may      account  of  said  property.]1 

Note.  Unless  otherwise  provided  in  the  classification,  property  will 
be  carried  at  the  tariff  rates,  if  shipped  subject  to  the  conditions  of  the 
Uniform   Bill  of  Lading. 

If  the  shipper  elects  not  to  accept  the  said  tariff  rates  and  conditions,  he 
should  so  notify  the  agent  of  the  receiving  carrier  at  the  time  his  property 
is  offered  for  shipment ;  and  if  he  does  not  give  such  notice,  it  will  be  under- 
stood that  he  desires  his  property  carried  subject  to  the  Uniform  Bill  of 
Lading  conditions  in  order  to  secure  the  reduced  class  rates  thereon.  Prop- 
erty carried  not  subject  to  the  conditions  of  the  Uniform  Bill  of  Lading 
will  be  at  the  carrier's  liability,  limited  only  as  provided  by  common  law 
and  the  laws  of  the  United  States  and  of  the  several  states,  in  so  far  as 
they  apply.  Property  thus  carried  will  be  charged  twenty  per  cent  higher 
(subject  to  a  minimum  increase  of  one  cent  per  hundred  pounds)  than 
if  shipped  subject  to  the  conditions  of  the  Uniform  Bill  of  Lading,  and  the 
cost  of  marine  insurance  will  be  added  over  any  part  of  the  route  that  may 
be  by  water. 

IV.   Cases  not  strictly  of  Bailment 

70.  Public  carriers  of  passengers  and  baggage.  Public  carriers 
of  passengers  are  those  who  in  the  exercise  of  a  public  calling 
hold  themselves  out  as  ready  to  carry  all  passengers  who  apply. 
They  are  not,  of  course,  bailees  of  the  persons  whom  they 
carry,  although  they  are  bailees  of  a  passenger's  baggage  deliv- 
ered into  their  custody.  Proprietors  of  railways,  street  railways, 
stagecoaches,  steamers,  ferries,  omnibuses,  and  the  like  are 
public  carriers. 

i.  Passengers.  Passengers  are  those  persons  carried  by  a 
public  carrier  with  his  consent,  except  persons  in  his  service. 
Persons  carried  gratuitously  as  well  as  persons  who  pay  their 
fare  are  included.  It  is  the  duty  of  a  public  carrier,  up  to  the 
limit  of  reasonable  accommodations,  to  carry  all  who  are  orderly 
and  who  pay  the  reasonable  charge. 

2.  Liability  of  public  carrier  of  passengers.  A  public  carrier 
does  not  insure  the  safety  of  passengers  as  he  does  the  safety 
of  goods,  but  he  is  bound  to  use  the  utmost  skill,  diligence,  and 
caution,  so  far  as  human  foresight  may  go,  and  is  liable  for 

1  The  portion  in  brackets  may  be  omitted  by  any  carrier. 


S7o]  CARRIERS  OF  PASSENGERS  123 

slight  negligence  in  this  regard.  He  is  liable  also  for  any 
willful  injury  inflicted  by  one  of  his  servants,  and  is  bound 
to  use  reasonable  care  to  protect  the  passenger  from  violence 
at  the  hands  of  other  passengers.  He  may  eject  a  passenger 
for  refusal  to  pay  fare  or  for  disorderly  conduct,  using  only  as 
much  force  as  is  necessary  for  that  purpose. 

Whether  a  carrier  may  limit  his  liability  to  a  passenger  by 
contract,  and  especially  the  liability  for  the  negligence  of  serv- 
ants, is  a  disputed  question.  He  may  in  England  and  in  New 
York  and  some  other  states,  but  the  United  States  Supreme 
Court  and  the  courts  of  most  states  regard  such  contracts  as 
against  public  policy,  although  the  United  States  Supreme 
Court  permits  a  carrier  to  limit  its  liability  to  a  passenger 
carried  gratuitously. 

3.  Baggage.  A  carrier  is  bound  to  transport  a  reasonable 
amount  of  baggage  for  each  passenger.  Baggage  includes  such 
articles  of  necessity  or  convenience  as  a  passenger  may  carry 
for  his  personal  use,  but  not  articles  carried  as  merchandise. 
For  all  baggage  that  is  delivered  into  the  custody  of  the  car- 
rier he  is  liable  as  insurer,  unless  the  liability  is  limited  by 
lawful  contract.  In  this  respect  the  liability  is  the  same  as 
that  of  the  carrier  of  goods.  There  are  therefore  usually  but 
three  questions  that  arise  in  the  case  of  the  loss  of  baggage: 

(1)  were  the  articles  lost  really  the  baggage  of  the  passenger? 

(2)  was  the  baggage  actually  delivered  into  the  custody  of  the 
carrier,  or  did  the  passenger  retain  custody  of  it?  (3)  was  there 
any  lawful  contract  limiting  the  liability  of  the  carrier? 

Examples  :  1.  A  traveler  going  to  the  woods  for  recreation  carried  in 
his  trunk  guns  and  fishing  tackle  and  tennis  rackets.  The  trunk  was  lost 
by  the  carrier.  Under  the  circumstances  these  articles  were  held  to  be 
properly  baggage. 

2.  A  commercial  traveler  carried  in  a  trunk  samples  of  the  goods  he  was 
selling.    These  were  held  not  to  be  baggage. 

3.  A  traveler  carried  in  his  trunk  presents  for  friends.  These  were  held 
not  to  be  baggage. 

4.  A  traveler  carried  a  hand  bag  into  the  car  and  left  it  in  his  seat  while 
he  went  to  the  smoking  car,  and  it  was  stolen.  The  baggage  was  not  in  the 
custody  of  the  carrier,  and  the  latter  was  not  liable  for  the  loss. 


124  BAILMENT  [Cn.  V] 

71.  Telegraph  and  telephone  companies.  These  are  not  com- 
mon carriers.  A  few  jurisdictions  have  held  them  to  be  com- 
mon carriers,  but  the  greater  number  treat  them  as  companies 
rendering  a  public  service  and  bound  to  serve  all  persons  alike 
and  for  uniform  reasonable  compensation.  They  do  not  insure 
the  safety  and  accuracy  of  messages,  but  are  bound  to  use  rea- 
sonable care  and  are  liable  for  ordinary  negligence.  They  may 
become  insurers  by  contract  for  added  compensation. 

Whether  they  may  by  contract  stipulate  against  their  own 
negligence  is  a  disputed  question.  It  is  generally  held  that 
they  may,  but  some  courts  regard  such  contracts  as  against 
public  policy.  Where  such  contracts  are  upheld,  the  telegraph 
companies  refuse  to  become  liable  for  errors  in  transmission 
unless  the  sender  has  the  message  repeated  and  pays  an  added 
compensation  therefor. 

Either  the  sender  or  the  addressee  of  the  message  may  sue 
in  tort  for  damages  arising  from  the  negligence  of  the  company, 
but  only  the  sender  can  sue  for  breach  of  contract,  because  he 
alone  has  made  a  contract,  unless,  indeed,  the  sender  was  actually 
the  agent  of  the  addressee  and  made  the  contract  in  his  behalf. 

It  is  generally  made  a  penal  offense  for  telegraph  compa- 
nies or  any  of  their  employees  to  divulge  the  contents  of  tele- 
grams to  any  one  except  the  addressee. 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  61.  Define  bailment;  bailor;  bailee.  Is  a  finder  of  lost 
property  a  bailee?  How  is  his  duty  fixed?  What  is  the  consideration  for 
a  bailee's  promise?  Can  one  who  does  not  own  property  bail  it  to  another? 
Distinguish  bailment  from  sale;  from  barter;  from  a  mutuum.  Maya 
bailee  mix  the  goods  with  other  like  goods? 

62.  State  the  two  classes  of  bailments.  State  the  subclasses  of  each. 
What  is  a  deposit?  What  is  a  mandate?  What  is  a  commodatum  ?  What 
is  a  pawn?  What  is  a  hiring?  State  three  general  and  two  special  cases 
of  hired  services  about  a  thing.  State  two  cases  not  strictly  bailment  but 
treated  thereunder. 


REVIEW  QUESTIONS  AND  PROBLEMS  125 

63.  How  is  a  bailment  for  bailor's  sole  benefit  created  ?  Is  it  a  contract  ? 
Must  the  bailor  know  of  it?  Must  the  bailee  consent  to  it?  What  are  the 
bailor's  obligations?  What  are  the  bailee's  duties?  How  much  care  must 
he  use?  Can  he  use  the  article?  Is  he  liable  if  the  article  is  lost?  When 
is  this  bailment  terminated  ? 

Problem  1.  A  bank  undertook  gratuitously  to  keep  in  its  vaults  a  locked 
chest  of  C's  containing  $50,000  in  gold.  The  bank  cashier  stole  it  together 
with  money  belonging  to  the  bank  and  absconded.    Is  the  bank  liable  to  C? 

Problem  2.  In  the  above  case  the  directors  learned  that  the  cashier  was 
engaged  in  heavy  stock  speculations,  but  took  no  steps  to  investigate  his 
conduct.    Result  ? 

64.  How  is  a  bailment  for  the  bailee's  sole  benefit  created?  Is  a  prom- 
ise to  lend  enforceable,  and  why?  What  is  the  bailor's  duty?  What  are 
the  duties  of  the  bailee?  How  much  care  must  he  use?  May  he  lend  the 
article  to  others?  May  he  use  it  for  a  purpose  not  agreed  upon?  May  the 
bailee  deliver  the  article  to  a  claimant  other  than  the  bailor?  How  is  this 
bailment  terminated  ? 

65.  Define  a  pledge.  How  is  it  created?  What  is  essential?  What 
warranty  does  the  pledgor  make?  Can  he  sell  the  pledged  article?  Can 
the  pledge  be  made  irredeemable?  What  are  the  duties  of  the  pledgee? 
What  care  must  he  use?  What  are  the  pledgee's  rights?  How  may  he  sell 
the  pledge  ?  Can  he  purchase  ?  When  is  the  pledge  terminated  ?  What 
claim  does  the  pledge  secure?  Who  are  pawnbrokers?  May  they  charge 
more  than  the  usual  rate  of  interest  ? 

Proble?n  3.  B  owed  a  bank  $5000.  He  then  borrowed  of  the  bank 
$10,000  and  pledged  300  shares  of  stock  as  security  for  the  loan.  B  then 
became  insolvent  and  all  his  property  was  transferred  to  a  trustee  for  the 
benefit  of  his  creditors.  The  bank  sold  the  stock  for  $13,500,  paid  the  loan 
of  $ 1 0,000,  and  applied  the  surplus  $3500  on  the  prior  indebtedness.  The 
trustee  sues  the  bank  for  this  $3500.    Which  is  entitled  to  it  ? 

66.  How  is  a  bailment  by  hiring  a  thing  created?  Is  a  promise  by  the 
bailor  to  hire  it  to  the  bailee  enforceable?  What  does  the  bailor  warrant? 
What  is  his  duty  as  to  defects  ?  What  are  the  rights  of  the  bailee  ?  What 
are  his  duties?  How  much  care  must  he  use?  If  a  third  person  injures  the 
article,  is  the  bailee  liable?  Is  he  liable  to  third  persons,  and  when?  Are 
they  liable  to  him?  Are  they  liable  to  the  bailor?  Who  is  liable  in  case 
the  article  is  accidentally  destroyed?  If  the  bailee  uses  the  article  other- 
wise than  he  agreed,  what  is  the  result? 

Problem  4.  C  hires  a  horse  and  carriage  of  X.  B  negligently  runs  into 
and  injures  the  carriage  to  the  extent  of  $20.  C  sues  B  for  this  damage. 
May  he  recover? 


I26  BAILMENT  [Ch.  V] 

Problem  j.  As  above.  The  horse  falls  sick  while  C  is  on  a  journey. 
C  leaves  him  with  D  for  care  and  treatment.  D  sues  X  for  the  expense. 
Result? 

67.  What  classes  of  bailments  of  the  hiring  of  services  about  a  thing  ? 
What  are  the  duties  of  the  bailor?  How  is  compensation  fixed?  May  the 
bailee  recover  if  he  abandons  the  work  midway?  May  he  recover  if  after 
he  has  finished  the  work  the  article  is  destroyed?  What  are  the  duties 
of  the  bailee?  How  much  care  must  he  exercise?  What  is  the  bailee's 
lien?  Who  is  a  warehouseman?  May  he  mix  goods?  Who  are  wharf- 
ingers? Is  a  safe  deposit  a  warehouse?  Does  money  deposited  in  a  bank 
create  a  bailment? 

Problem  6.  C  deposited  his  goods  in  B's  warehouse.  They  were  stolen. 
C  sues  B.  C  contends  it  is  for  B  to  show  he  used  due  care.  B  contends  it 
is  for  C  to  show  that  B  was  negligent.    Which  is  right? 

68.  Who  are  innkeepers?  Is  a  steamship  an  inn?  Is  a  sleeping  car? 
Who  are  guests  ?  Must  an  innkeeper  receive  all  guests  who  apply  ?  What 
are  his  liabilities  as  to  a  guest's  goods?  State  three  holdings  on  this. 
What  do  statutes  provide  ?  What  is  the  innkeeper's  lien  ?  When  is  an  inn- 
keeper an  ordinary  bailee  ? 

Problem  J.  C  drove  to  an  inn  and  had  his  horse  placed  in  the  stable 
connected  with  it.  The  horse  was  kicked  by  the  horse  of  another  traveler 
and  its  leg  broken.  C  sues  the  landlord  of  the  inn.  The  landlord  offers  to 
prove  he  was  not  negligent.    Would  such  proof  release  him  from  liability  ? 

Problem  8.  An  inn  is  accidentally  burned  and  a  guest's  clothes,  jewelry, 
etc.,  are  destroyed.    Is  the  innkeeper  liable  ? 

Problem  g.  While  C  was  in  a  sleeping-car  berth,  and  while  asleep,  he 
was  robbed  of  his  money  and  watch.  Is  the  sleeping-car  company  liable  to 
him  for  this  loss  ? 

69.  Who  are  common  carriers  ?  What  two  things  distinguish  a  common 
carrier  from  a  private  carrier?  What  goods  must  a  common  carrier  accept? 
May  he  give  special  rates?  What  statutes  govern  rates?  How  can  a  com- 
mon carrier  escape  liability  for  loss  of  goods  ?  What  is  an  act  of  God  ? 
Who  is  a  public  enemy?  When  is  the  shipper  at  fault?  What  are  inherent 
infirmities  in  the  goods?  May  a  shipper  contract  against  Joss  by  above 
causes?  May  he  contract  against  loss  due  to  his  own  negligence  or  that  of 
his  servants?  When  does  his  liability  as  common  carrier  end?  What  is 
the  liability  of  a  railway  when  goods  reach  their  destination  and  are  placed 
in  the  freight  house  ?  When  goods  go  over  several  railways,  which  is  liable 
for  damage  to  them  ?  When  is  a  common  carrier  excused  for  nondelivery? 
What  is  a  bill  of  lading  ?    What  is  a  charter  party  ? 


REVIEW  QUESTIONS  AND  PROBLEMS  127 

Problem  10.  B  owned  a  sloop  which  he  used  for  his  own  business.  On 
two  occasions  he  carried  goods  for  C.  On  the  second  occasion  the  sloop 
was  driven  ashore  (not  by  an  act  of  God  nor  by  the  negligence  of  B)  and 
the  goods  were  injured.    Is  B  liable  to  C  ? 

Problem  II.  B  owns  a  vessel  running  regularly  between  two  ports  and 
carrying  passengers  and  freight.  C  ships  goods  on  the  vessel.  1 1  is  destroyed 
by  fire  while  at  sea.    Is  B  liable  to  C  for  the  loss  of  the  goods? 

Problem  12.  In  the  above  case  the  vessel  is  captured  by  a  war  vessel  of 
another  nation  with  which  B's  nation  is  at  war,  and  the  goods  are  confis- 
cated.   Is  B  liable  to  C? 

Problem  fj.  C  shipped  plate  glass  from  New  York  City  to  Marion,  N.C. 
The  glass  went  over  four  different  railroads.  At  Marion  it  was  found  to  be 
broken.  C  sues  the  B.  Ry.  which  delivered  the  glass  at  Marion.  The  bill 
of  lading  provided  that  "  No  carrier  shall  be  liable  for  loss  or  damage  not 
occurring  on  its  own  road,"  and  only  for  loss  by  negligence.  When  the 
B.  Ry.  received  the  box  there  was  no  sign  of  breakage,  nor  was  there  any 
when  it  reached  Marion,  until  the  box  was  opened.  The  B.  Ry.  contends 
that  it  is  not  liable  unless  C  shows  that  the  breakage  occurred  on  its  road. 
C  contends  that  the  B.  Ry.  must  show  it  was  not  negligent.    Which  is  right? 

70.  Who  are  public  carriers  ?  Who  are  passengers  ?  What  is  the  liabil- 
ity of  a  public  carrier  for  safety  of  passengers,  and  what  for  safety  of  bag- 
gage? What  is  baggage?    May  the  carrier  limit  liability  for  its  loss? 

Problem  14.  C,  a  passenger,  brought  action  against  the  B.  Ry.  for  loss 
of  baggage.  The  trunk  contained  very  valuable  dress  laces  worth  $  10,000. 
C  was  a  wealthy  foreigner  traveling  in  this  country,  and  the  laces  were  a 
part  of  her  wearing  apparel.    Is  the  Ry.  liable  for  these  laces? 

71.  Are  telegraph  and  telephone  companies  common  carriers?  What 
is  their  liability?  May  they  contract  against  their  negligence?  May  the 
addressee  of  a  message  sue  for  negligence?    How? 


CHAPTER  VI 
INSURANCE  CONTRACTS 

72.  Nature  and  kinds  of  insurance.  Insurance  is  a  system  for 
distributing  the  losses  of  a  few  persons  among  a  large  class  of 
persons  similarly  situated.  This  is  accomplished  by  raising  a 
general  fund  through  small  contributions  by  many  persons,  each 
contributor  being  entitled  to  indemnity  out  of  the  fund  in  case 
a  loss  falls  upon  him.  If  iooo  persons  having  in  the  aggregate 
property  valued  at  $5,000,000  pay  annually  into  a  common  fund 
ifo  upon  this  valuation,  a  fund  of  $50,000  will  be  raised  out  of 
which  losses  by  fire  falling  upon  any  of  these  persons  could  be 
paid.  If  these  1000  persons  live  in  widely  separated  parts  of  the 
country,  it  is  unlikely  that  many  of  them  will  suffer  losses  by 
fire  in  the  same  year. 

Almost  every  conceivable  risk  may  now  be  insured.  The 
main  heads  of  insurance  are  marine  insurance,  fire  insurance, 
and  life  insurance,  but  there  are  companies  which  insure  against 
tornadoes,  steam-boiler  explosions,  breakage  of  plate  glass, 
defects  in  titles,  defaults  or  embezzlements  by  agents,  injuries 
to  employees,  injuries  to  one's  self,  and  numerous  other  hazards. 

Marine  insurance  —  that  is,  insurance  against  the  risk  of  the 
loss  of  vessels  and  cargoes  at  sea  —  is  probably  the  oldest  form 
of  insurance  and  has  been  traced  back  to  the  twelfth  or  thir- 
teenth century.  Fire  insurance  came  into  prominence  after  the 
great  London  fire  of  1666.  Life  insurance  began  practically  in 
the  eighteenth  century. 

In  marine  and  fire  insurance  the  properties  insured  are  clas- 
sified according  to  the  risk,  and  the  premium  is  higher  or  lower 
as  the  risk  is  greater  or  less.  In  life  insurance  only  those  per- 
sons who  are  regarded  as  good  risks  are  insured,  and  the  pre- 
miums are  graded  according  to  the  age  of  the  insured.   Statistics 

123 


[§§73-74]  POLICIES  — DEFINITIONS  1 29 

have  been    accumulated   upon  which  average  results  may   be 
predicted  and  the  premiums  based. 

73.  Kinds  of  policies.  The  policies,  or  contracts  of  insurance, 
issued  by  insurance  companies  are  of  various  kinds,  but  it  is 
necessary  to  distinguish  the  valued  and  the  open  policy. 

The  valued  policy  is  one  that  fixes  the  amount  to  be  paid  in 
case  of  loss.  These  policies  are  always  used  in  life  insurance, 
and  are  very  generally  used  in  the  insurance  of  ships,  though 
not  of  cargoes.  In  case  of  the  death  of  the  insured  or  the  loss 
of  the  ship  the  sum  specified  is  paid. 

The  open  policy  is  one  in  which  the  amount  to  be  paid  in 
case  of  loss,  not  exceeding  a  certain  sum,  is  left  to  be  fixed 
after  the  loss  occurs.  These  policies  are  generally  used  in  fire 
insurance. 

Life-insurance  policies  are  either  the  "life  policy,"  payable 
only  at  the  death  of  the  insured,  or  the  "endowment  policy," 
payable  when  the  insured  reaches  a  certain  age,  or  upon  his 
death  at  any  prior  date.  There  is  also  a  "  term  policy  "  for  a 
fixed  number  of  years,  payable  only  if  the  insured  dies  within 
that  time. 

74.  Definitions.  Insurance  is  a  contract  whereby  for  a  stipu- 
lated consideration  one  party  agrees  to  compensate  or  indemnify 
the  other  for  loss  on  a  specified  subject  by  specified  perils. 

The  insurer  is  the  one  agreeing  to  indemnify.  He  is  some- 
times called  the  underwriter.  The  insured  is  the  one  to  whom 
the  promise  runs.  The  premium  is  the  agreed  consideration. 
The  policy  is  the  written  contract.  The  risk  or  peril  is  the 
event  insured  against.  The  insurable  interest  is  the  subject, 
right,  or  interest  to  be  protected  ;  it  is  such  an  interest  as 
will  entitle  the  person  possessing  it  to  obtain  a  lawful  contract 
of  insurance  (see  sec.  76). 

Life  insurance  is  a  contract  to  pay  a  designated  or  determi- 
nable person  a  certain  sum,  or  an  annuity,  in  the  event  of  the 
death  of  the  person  whose  life  is  insured.  Endowment  life 
insurance  is  a  contract  to  pay  a  certain  sum  or  annuity  to  the 
person  whose  life  is  insured  if  he  lives  a  certain  length  of  time, 
or  to  a  designated  person  if  he  dies  before  this  time.    Tontine 


1 30  INSURANCE  CONTRACTS  [Ch.  VI 

insurance  (from  Tonti,  an  Italian,  who  is  said  to  have  devised 
it)  is  a  system  whereby  surplus  funds,  often  derived  from  lapsed 
policies  and  often  from  the  profits  of  investments  by  the 
insurer,  are  to  be  apportioned  among  those  of  the  insured  who 
continue  their  insurance  for  the  specified  tontine  or  dividend 
period.  There  are  various  forms  of  the  tontine  or  dividend  sys- 
tem. An  endowment  policy  is  a  form  of  investment  by  the 
insured  as  well  as  an  insurance  proper. 

Accident  insurance  is  a  contract  to  indemnify  the  insured 
against  personal  injury  resulting  from  accident,  and  usually 
includes  a  contract  to  pay  a  specified  sum  to  his  estate  or  to  a 
designated  person  in  case  of  death  resulting  from  accident. 

Marine  insurance  is  a  contract  to  indemnify  the  insured 
against  loss  to  property  (ships  and  cargo)  arising  from  the 
perils  of  the  sea  during  a  certain  voyage  or  a  certain  period  of 
time.  It  may  be  issued  to  cover  risks  arising  on  any  navigable 
waters  whether  sea  or  inland. 

Fire  insurance  is  a  contract  to  indemnify  the  insured  against 
loss  of  property  or  damages  to  it  by  fire. 

Casualty  insurance  is  a  contract  to  indemnify  the  insured 
against  damage  to  property  arising  from  accidents,  such  as 
boiler  explosions,  floods,  tornadoes,  hail,  failure  of  crops,  break- 
age of  plate  glass,  death  of  cattle,  burglary,  etc. 

Guaranty  and  fidelity  insurance  is  a  contract  to  indemnify  the 
insured  against  loss  arising  from  fraud  or  dishonesty  of  agents 
(fidelity  insurance) ;  the  negligence  of  employees  resulting  in 
damage  to  other  employees  for  which  the  employer  is  obliged 
to  pay  (employers'  liability  insurance);  the  injury  to  passengers 
for  which  the  carrier  is  obliged  to  pay  damages  (carriers'  lia- 
bility insurance)  ;  the  insolvency  or  dishonesty  of  debtors 
(credit  insurance)  ;  the  failure  of  tenants  to  pay  rent  or  the 
loss  of  rents  incident  to  fires  or  other  injury  to  premises  (rent 
insurance) ;  the  defect  or  failure  of  title  to  real  property  (title 
insurance) ;  or  the  interruption  to  business  by  strikes  among 
employees  (strike  insurance). 

Reinsurance  is  a  contract  whereby  the  reinsurer  agrees  to 
assume  the  risk,  in  whole  or  in  part,  which  was  undertaken  by 


§75 1  CHARACTERISTICS  131 

the  original  insurer.  If  the  reinsurance  policy  binds  the  rein- 
surer to  pay  the  insured,  the  latter  may  maintain  an  action 
against  the  reinsurer  upon  the  theory  of  a  promise  made  to  one 
person  for  the  benefit  of  another  person  (see  sec.  33  ante);  but 
in  the  absence  of  such  a  clause  the  insured  can  look  to  the  orisri- 
nal  insurer  alone,  and  the  original  insurer  will  look  to  the  rein- 
surer for  indemnity.  It  often  happens  that  an  insurer  takes  a 
very  large  risk,  and  thinks  it  prudent  to  divide  it  by  reinsuring 
some  portion  of  it  in  another  company.  The  reinsurance  is  a 
kind  of  guaranty  insurance. 

75.  Characteristics.  There  are  these  main  characteristics  in 
the  insurance  contract. 

1.  The  contract  is  aleatory,  that  is,  depending  upon  an  uncer- 
tain event.  It  is  in  the  nature  of  a  wagering  contract.  If  one 
insures  property  or  a  life  in  which  he  has  no  insurable  interest, 
the  contract  is  called  a  wager  and  is  illegal.  If  he  has  an  insur- 
able interest,  the  contract  is  valid,  although  it  is  still  somewhat 
in  the  nature  of  a  wager. 

2.  The  contract  is  one  of  indemnity,  that  is,  to  make  good 
against  loss  in  the  event  that  loss  occurs.  In  the  open  policy 
the  amount  of  the  loss  is  to  be  ascertained  after  it  occurs.  In 
the  valued  policy  the  parties  agree  in  advance  upon  the  value 
of  the  subject-matter  of  the  contract ;  if  it  is  then  destroyed, 
the  loss  is  taken  to  be  that  so  fixed  by  the  parties.  In  life- 
insurance  policies  the  sum  is  always  fixed,  subject  to  a  possible 
increment  in  a  tontine  policy. 

There  is  one  important  difference  between  an  open  fire  policy  and  an  open 
marine  policy.  If,  in  an  open  fire  policy  for  $10,000  upon  property  worth 
$20,000,  property  worth  $5000  is  destroyed,  the  insured  recovers  its  full 
value.  In  an  open  marine  policy  he  would  recover  only  that  proportion  of 
the  amount  insured  (Si 0,000)  which  the  loss  ($5000)  bears  to  the  true 
value  of  the  property  insured  (520,000),  namely,  one  fourth,  or  $2500.  In 
order  to  be  fully  protected  in  a  marine  risk,  the  insured  must  insure  to  the 
full  value  and,  of  course,  pay  a  larger  premium. 

Another  incident  of  the  indemnity  feature  is  that  if  the  property  insured 
be  destroyed  by  the  negligent  act  of  a  third  person,  so  that  the  owner 
might  maintain  an  action  against  the  wrongdoer  for  the  damage,  the  insurer 
upon  paying  the  loss  to  the  insured  is  subrogated  (that  is,  substituted)  to 


I32  INSURANCE  CONTRACTS  [Ch.  VI 

the  rights  of  the  insured  in  such  action.  Were  it  otherwise,  the  insured  would 
recover  his  loss  twice  over.  This  does  not  apply,  however,  to  life  insurance 
where  the  insured  is  killed  by  the  wrongful  or  negligent  act  of  another. 

If  the  insured  has  two  fire  policies  in  different  companies  upon  the  same 
property,  the  companies  contribute  ratably  to  indemnify  for  any  loss.  If  one 
pays  the  whole  loss,  it  may  secure  a  ratable  contribution  from  the  other. 

3.  The  contract  indemnifies  even  against  the  carelessness 
or  negligence  of  the  insured.  This  is  highly  important,  because 
if  the  insurer  could  defend  after  loss  upon  the  ground  that  the 
insured  by  his  negligence  contributed  to  the  disaster,  the  policy 
would  not  be  nearly  so  valuable  as  a  security  against  serious 
pecuniary  losses.  It  does  not  indemnify  against  willful  destruc- 
tion by  the  insured,  except  that  suicide  will  not,  by  the  weight 
of  authority,  defeat  a  life-insurance  policy  unless  the  insured 
can  be  shown  to  have  taken  out  the  policy  with  the  intent  to 
commit  suicide.  There  are  also  some  terms  and  some  warran- 
ties in  insurance  contracts,  the  breach  of  which  will  prevent 
the  insured  from  recovering  ;  for  example,  in  accident  policies 
that  the  insured  shall  not  voluntarily  expose  himself  to  unneces- 
sary risks,  or  in  fire  policies  that  the  insured  shall  use  reason- 
able care  and  means  to  save  property  after  a  fire  begins. 

The  case  of  suicide  has  caused  the  courts  much  perplexity.  The  federal 
courts  and  some  state  courts  refuse  to  allow  the  estate  of  the  deceased  to 
recover  where  the  insured  committed  suicide  when  sane,  regarding  it  as 
against  public  policy.  Some  states  allow  a  third  person  named  as  benefi- 
ciary to  recover  where  they  do  not  allow  the  estate  of  the  deceased  to 
recover.  All  courts  allow  a  recovery  in  any  case  where  the  insured  com- 
mitted suicide  while  insane,  unless  the  policy  expressly  excepts  that  risk  ; 
but  the  exception  of  the  risk  of  "  death  by  suicide  "  covers  only  suicide 
while  sane  ;  in  order  to  exempt  the  insurer  the  policy  should  read  "  death 
by  suicide  whether  sane  or  insane  excepted."  One  or  two  states  have  by 
statute  forbidden  insurance  companies  to  insert  such  a  clause. 

In  case  the  insured  is  executed  by  the  law  for  a  capital  offense  the 
insurer  will  not  be  liable  on  the  policy  even  though  that  risk  is  not  ex- 
pressly excepted. 

Many  life-insurance  policies  now  contain  a  clause  declaring  the  policy 
to  be  incontestable  after  a  certain  period  (say  two  or  three  years  after  it  is 
issued).  In  such  case  the  insurer  can  contest  the  policy  only  for  a  lack  of 
any  insurable  interest  or  for  actual  fraud  in  procuring  it,  or  because  the  loss 
or  death  was  due  to  an  expressly  excepted  risk. 


§76]  INSURABLE  INTEREST  133 

4.  The  insured  must  have  an  insurable  interest  (see  sec.  76). 

5.  The  contract  requires  the  highest  good  faith  on  the  part 
of  the  insured  (see  sec.  77). 

6.  The  contract  contains  warranties,  the  breach  of  which 
may  avoid  the  policy  (see  sec.  78). 

7.  The  statutes  often  prescribe  the  form  of  policy  which 
must  be  issued  (see  sec.  79).  Insurance  contracts  may  be  oral. 
Statutes  prescribing  a  form  of  policy  do  not  prevent  oral  con- 
tracts, but  subject  an  oral  contract  to  the  provisions  of  the 
statutory  policy.  It  is  usual  in  large  insurance  offices  to  issue 
to  the  insured  temporarily  a  "binding  slip,"  which  is  a  brief 
memorandum  of  the  insurance  contract  and  gives  protection 
pending  the  delivery  of  the  formal  insurance  policy. 

76.  The  insured  must  have  an  insurable  interest.  In  order  that 
a  policy  should  be  valid  it  is  necessary  that  the  one  taking  it 
out  should  have  an  insurable  interest  in  the  property  or  the 
life  upon  which  the  policy  is  issued. 

1.  Insurable  interest  in  property.  An  insurable  interest  in 
property  is  an  interest  in  property,  or  a  liability  in  respect  of 
property,  of  such  a  nature  that  the  loss  of  the  property  might 
cause  a  pecuniary  injury  to  the  one  possessing  such  interest 
or  under  such  liability. 

Example.  A  pledgee  has  such  an  interest  in  the  pledge  that  its  destruc- 
tion would  or  might  result  in  a  pecuniary  loss  to  him  ;  so  also,  of  course, 
has  the  pledgor.  Both  the  mortgagor  and  the  mortgagee  of  property  have 
an  insurable  interest.  A  stockholder  has  an  insurable  interest  in  the  prop- 
erty of  the  corporation.  A  farmer  has  an  insurable  interest  in  crops  to  be 
raised  in  the  future  upon  his  land.  A  mere  expectancy,  like  that  of  an  heir 
who  expects  to  inherit  his  ancestor's  property,  does  not  create  an  insurable 
interest.  If  one  insures  his  interest  and  afterwards  sells  it,  the  policy  does  not 
pass  to  the  new  owner  without  an  assignment  with  the  consent  of  the  insurer. 

2.  Insurable  interest  in  a  life.  This  is  very  difficult  to  define. 
Any  reasonable  expectation  of  pecuniary  benefit  from  the  con- 
tinued life  of  another  creates  an  insurable  interest  in  that  life. 
If  one  depends  upon  another  for  support  or  education,  in  whole 
or  in  part,  he  has  an  insurable  interest  in  that  other's  life. 
Thus  a  wife  has  an  insurable  interest  in  the  life  of  her  hus- 
band.   If  one  is  entitled  to  the  services  of  another,  he  has  an 


134  INSURANCE  CONTRACTS  [Ch.  VI 

insurable  interest  in  that  other's  life.  Thus  a  husband  has 
an  insurable  interest  in  the  life  of  his  wife,  and  a  father  has 
an  insurable  interest  in  the  life  of  his  minor  children.  If  one 
has  a  pecuniary  claim  upon  another,  he  may  insure  that  other's 
life.  Thus  a  creditor  has  an  insurable  interest  in  the  life  of 
his  debtor.  Mere  relationship  by  blood  or  marriage  does  not 
of  itself  create  an  insurable  interest.  One  brother  has  no  insur- 
able interest  in  the  life  of  another  brother  merely  because  of 
the  relationship ;  he  might  have  if  he  were  dependent  upon 
the  brother.  One  may  value  his  interest  in  his  own  life,  or  in 
the  life  of  one  upon  whom  he  depends,  or  to  whose  services 
by  virtue  of  family  relationship  he  is  entitled,  at  any  sum  agreed 
upon.  But  a  creditor  cannot  insure  the  life  of  his  debtor  for  a 
sum  greatly  in  excess  of  the  debt.  It  seems  not  to  be  neces- 
sary that  the  person  whose  life  is  insured  by  another  should 
consent  to  the  insurance,  but  this  matter  is  in  some  doubt. 
There  are  grounds  of  public  policy  which  might  require  the 
consent  of  a  person  to  have  insurance  taken  out  upon  his  life. 

The  insurable  interest  in  property  must  continue  throughout 
the  term  of  the  policy,  or  at  least  exist  at  the  time  of  the  loss. 
It  is  enough  in  life  insurance  that  it  exist  at  the  time  the  policy 
is  taken  out.  So  also  in  life  insurance  the  policy  may  be  assigned 
to  one  who  has  no  insurable  interest,  if  it  was  taken  out  in  good 
faith  by  one  who  had  an  insurable  interest ;  and  the  insured 
may  make  his  policy  payable  to  any  one  if  he  takes  it  out  him- 
self. Where  a  policy  designates  the  beneficiary,  the  right  under 
the  policy  becomes  vested  in  such  beneficiary  and  cannot  be 
disturbed  without  his  consent.  Should  the  beneficiary  die,  how- 
ever, before  the  insured,  a  new  beneficiary  may  be  named. 

77.  The  contract  of  insurance  is  one  requiring  the  highest  good 
faith.  In  ordinary  contracts  a  party  is  not  bound  to  disclose 
what  he  knows  about  the  subject-matter  of  the  contract;  it  is 
for  the  other  party  to  discover  whatever  he  may  deem  impor- 
tant. So  long  as  there  is  no  misrepresentation  the  contract  is 
valid  and  binding,  notwithstanding  one  party  knew  and  did  not 
disclose  certain  material  defects.  But  insurance  contracts  stand 
upon  a  peculiar  basis  in  this  respect. 


§77]  GOOD  FAITH  1 35 

1.  Concealment.  The  insured  is  bound  to  disclose  to  the 
insurer  every  material  fact  known  to  him  which  affects  the  risk. 
But  this  rule  is  qualified  in  the  United  States,  except  as  to 
marine  insurance,  by  requiring  that  bad  faith  be  shown  in 
order  to  avoid  a  policy  because  of  concealment. 

Examples  :  1 .  An  attempt  has  been  made  to  burn  B's  property.  B  be- 
comes alarmed  and  effects  insurance  without  disclosing  this  fact.  The  policy 
may  be  avoided  by  the  insurer  upon  the  ground  of  B's  concealment. 

2.  B  effects  insurance  upon  his  house,  omitting  to  state  that  it  is  within 
a  few  feet  of  a  fireworks  manufactory.  This  concealment  as  to  the  risk  is 
fatal  to  the  validity  of  the  policy. 

The  rule  is  very  strict  in  marine  insurance  and  extends  to 
innocent  nondisclosure  due  to  forgetfulness  or  inadvertence; 
but  in  fire  and  life  insurance  it  now  probably  extends  in  this 
country  only  to  intentional  concealment  of  some  material  fact 
amounting  to  bad  faith.  Where  the  insurer  asks  a  series  of 
questions  in  an  application  blank,  a  truthful  answer  to  these 
questions  is  all  that  is  generally  required;  but  even  in  this  case 
the  insured  cannot  intentionally  conceal  a  highly  material  fact, 
as  that  an  attempt  has  been  made  to  set  fire  to  the  property. 

2.  Representations.  Representations  are  statements  made  by 
the  insured,  usually  to  give  information  concerning  the  risk, 
and  inducing  the  insurer  to  issue  a  policy,  but  which  do  not 
become  terms  in  the  contract  itself.  A  material  false  repre- 
sentation, however  innocently  made,  will  avoid  the  policy ; 
there  is  an  implied  condition  that  a  policy  shall  be  enforceable 
only  if  the  representations  which  induced  the  insurer  to  issue 
it  are  true.  But  a  representation  as  to  future  conduct,  that  is, 
a  promissory  representation,  is  not  a  material  one,  because  the 
insurer  should  not  rely  upon  it  unless  he  incorporates  it  into 
the  written  contract.  So  representations  as  to  opinion  or  belief 
are  not  material ;  no  one  should  rely  upon  them. 

Examples :  3.  B  insures  C's  warehouse.  C  by  mistake  states  that  there 
is  already  $200,000  of  insurance  on  the  building ;  there  was  in  fact  but 
$30,000.  Tin's  is  material,  since  with  $200,000  of  insurance  B's  ratable  por- 
tion in  case  of  loss  would  be  less  than  if  there  were  but  $30,000.  If  the 
building  burns,  C  can  recover  nothing  from  B.  It  makes  no  difference  that 
C  believed  his  statement  to  be  true. 


I36  INSURANCE  [Ch.  VI 

4.  C  orally  states  to  B  that  if  B  insures  his  building  he  will  cease  using 
a  certain  fireplace  in  it.  The  building  burns.  B  seeks  to  avoid  the  policy 
by  showing  that  C  continued  to  use  the  fireplace.  This  is  a  promissory 
statement  and  it  will  not  avoid  the  policy.  If  B  wants  the  benefit  of  a  prom- 
ise, he  must  incorporate  it  into  the  written  contract. 

78.  Warranties.  Unless  there  be  a  waiver  of  it,  or  an  estoppel 
to  set  it  up,  the  breach  of  a  warranty  in  an  insurance  contract 
will  avoid  the  policy. 

1.  Warranties  explained.  A  warranty  is  a  representation  or 
promise  which  is  included  in  the  policy  itself,  or  in  a  separate 
paper  incorporated  into  the  policy  by  reference,  and  which  is 
made  an  essential  part  of  the  contract.  Its  falsity  or  nonful- 
fillment will  avoid  the  policy.  A  representation  is  merely  an 
inducement  to  the  making  of  the  contract.  A  warranty  is  a 
part  of  the  contract  itself.  Representations  must  be  shown  to 
be  material,  and  it  is  enough  that  they  are  substantially  com- 
plied with.  Warranties  are  material  because  inserted  in  the 
contract,  and  they  must  be  strictly  and  literally  complied  with. 
They  may  be  either  affirmative  of  an  existing  fact  or  promis- 
sory. Note  that  warranty  has  one  meaning  in  insurance  con- 
tracts and  another  in  contracts  of  sale  (see  sees.  53,  54  ante). 
In  the  latter  it  is  collateral,  while  in  the  former  it  is  a  vital 
term  in  the  main  contract.  If  a  warranty  in  a  sale  is  broken, 
an  action  for  damages  results.  But  if  a  warranty  in  insurance 
is  broken  it  discharges  the  contract ;  no  action  for  damages  for 
its  breach  results. 

Examples :  1.  B  represents  that  his  vessel  has  twelve  guns  and  twenty 
men.    She  has  substantially  this  number  and  the  policy  is  good. 

2.  B  warrants  that  his  vessel  has  twelve  guns  and  twenty  men.  She 
has  substantially  this  number,  but  the  policy  is  avoided  because  there  is  a 
breach  of  the  warranty  in  not  having  precisely  the  armament  and  force 
warranted. 

3.  B  represents  that  ashes  arc  taken  out  of  his  factory  in  iron  hods. 
They  are  taken  out  in  copper  hods.  The  representation  is  substantially 
true  and  the  policy  is  binding.  But  if  B  warrants  that  the  ashes'are  taken  out 
in  iron  hods,  there  is  a  breach  of  the  warranty  and  the  policy  is  avoided. 
(So  stringent  is  this  rule  that  the  courts  incline  to  hold  statements  to  be  repre- 
sentations when  possible,  and  some  states  have  statutes  to  relieve  against 
forfeitures  for  technical  breaches  of  warranty.) 


§78]  WARRANTIES  1 37 

4.  B  in  the  printed  questions,  which  are  made  by  reference  a  part  of  the 
policy,  states  that  he  is  thirty  years  old.  fie  is  in  fact  thirty-five.  The 
policy  is  not  binding  on  the  insurance  company.     This  is  a  warranty. 

5.  B  states  as  a  warranty  that  the  building  insured  is  used  "for  winding 
and  coloring  yarn."  He  afterwards  uses  the  building  for  another  purpose. 
There  is  no  breach  of  warranty.  He  did  not  warrant  that  the  building 
would  continue  to  be  used  for  the  purpose  it  was  used  for  when  the  policy 
was  taken  out. 

These  rules  as  to  warranties  are  so  strict  and  work  so 
many  hardships  that  statutes  in  many  states  provide  that  war- 
ranties shall  not  avoid  an  insurance  policy  unless  they  are  in 
fact  material.    This  makes  warranties  more  like  representations. 

In  general,  courts  will,  if  possible,  construe  an  insurance 
policy  so  as  to  save  the  just  rights  of  the  insured  against  for- 
feiture for  a  merely  technical  breach  that  does  not  in  fact 
injure  the  insurer. 

2.  Waiver  and  estoppel.  The  doctrines  of  waiver  and  estop- 
pel are  frequently  invoked  to  prevent  the  insurer  from  taking 
advantage  of  a  misrepresentation  or  breach  of  warranty  by  the 
insured.  Waiver  is  the  voluntary  relinquishment  of  a  known 
right.  Estoppel  is  a  bar  raised  by  the  law  to  prevent  one  party 
from  denying  that  he  has  relinquished  a  right  when  by  his  con- 
duct he  has  led  the  other  party  reasonably  to  rely  upon  the 
conclusion  that  he  has  relinquished  it. 

Examples :  6.  A  policy  provides  that  it  shall  be  forfeited  if  the  insured 
increases  the  risk.  The  insured  increases  the  risk  by  using  the  property  for 
manufacturing  purposes.  The  insurer  with  knowledge  of  the  facts  tells  the 
insured  that  the  forfeiture  is  waived;  this  is  binding.  Again  with  knowl- 
edge of  the  facts  the  insurer  accepts  the  premium  ;  this  estops  the  insurer 
from  denying  that  he  has  waived  the  forfeiture. 

7.  The  policy  provides  that  if  the  building  insured  is  on  leased  ground 
the  policy  shall  be  forfeited.  Although  this  is  a  warranty  that  the  building 
is  not  on  leased  ground,  still  if  the  insured  informed  the  insurer  when  the 
application  was  made  that  the  building  was  on  leased  ground,  the  insurer  is 
estopped  to  set  up  a  forfeiture.1 

1  Massachusetts  and  New  Jersey  hold  that  there  is  no  waiver  or  estoppel  in  such 
a  case  because  they  refuse  to  permit  a  written  stipulation  to  be  varied  by  parol  evi- 
dence of  prior  or  contemporaneous  oral  communications,  though  it  might  be  varied 
by  subsequent  communications.  It  is  the  theory  that  all  prior  and  contemporaneous 
communications  are  merged  in  the  written  contract.  This  is,  perhaps,  the  doctrine 
held  by  the  United  States  Supreme  Court  also. 


I38  INSURANCE  CONTRACTS  [Ch.  VI 

Whether  a  particular  agent  has  authority  to  waive  a  stipula- 
tion in  the  policy  is  often  a  question  of  great  nicety.  Whether 
a  restriction  upon  an  agent's  authority  contained  in  the  policy 
itself  will  operate  as  notice  to  the  insured  of  such  restricted 
authority  is  a  question  upon  which  the  decisions  are  inhar- 
monious. The  weight  of  authority  is  that  the  agent  who  issues 
the  policy  may  make  a  contemporaneous  waiver,  although  he 
might   not   have  authority  to  make  a   subsequent  one. 

79.  Statutory  or  standard  policies.  In  order  to  avoid  the  diffi- 
cult questions  and  the  uncertainties  raised  by  the  widely  differ- 
ing forms  of  fire-insurance  policies,  many  states  have  passed 
statutes  requiring  the  insurance  companies  to  issue  a  uniform 
standard  policy  prescribed  by  the  statute  itself.  The  leading 
form  is  the  New  York  standard  policy.  Copies  of  this  may  be 
obtained  of  any  fire-insurance  agent,  and  it  should  be  care- 
fully read  by  all  who  carry  fire  insurance,  in  order  that  there 
may  be  no  inadvertent  violation  of  the  terms  by  the  insured. 
Massachusetts  has  a  standard  policy  which  differs  in  some 
important  particulars   from  that  of  New  York. 

For  example,  the  New  York  form  provides  that  the  policy  shall  be  void 
if  the  building  insured  becomes  vacant  or  unoccupied  and  so  remains  for 
ten  days,  while  the  Massachusetts  form  allows  thirty  days.  Many  clauses 
found  in  the  New  York  form  are  absent  from  the  Massachusetts  form. 
For  example,  the  New  York  form  provides  that  the  policy  shall  be  void  "  if 
the  interest  of  the  insured  be  other  than  unconditional  and  sole  ownership," 
or  "  if  the  building  be  on  ground  not  owned  by  the  insured  in  fee  simple," 
or  "  if  personal  property  be  or  become  encumbered  by  a  chattel  mortgage," 
while  the  Massachusetts  policy  is  silent  as  to  all  of  these  conditions. 

80.  Marine  insurance.  In  the  insurance  of  a  ship  or  cargo 
against  risks  at  sea  there  are  always  three  implied  warranties, 
namely,  that  the  ship  is  seaworthy,  that  there  shall  be  no  vol- 
untary deviation  from  a  specified  route,  and  that  the  adventure 
shall  be  for  a  legal  purpose. 

General  average  is  a  contribution  made  by  the  various  owners 
of  a  ship  and  cargo  toward  a  loss  sustained  by  one  owner  whose 
property  has  been  voluntarily  sacrificed  for  the  common  safety, 
as  where,  in  a  storm,  goods  are  cast  overboard  to  lighten  the 


§8o]  MARINE  INSURANCE  1 39 

ship.  But  the  one  whose  goods  are  thrown  over  loses  his  pro 
rata  share  of  the  goods  also.  Throwing  property  over  for  such 
a  purpose  is  called  jettison.  General  average  is  a  rule  of  the 
admiralty  courts  based  upon  the  usages  of  maritime  commerce. 

Example.  B's  property  valued  at  $4800  is  cast  overboard  in  order  to 
save  the  ship  and  the  rest  of  the  cargo.  The  ship  is  valued  at  $50,000  ;  it 
earns  S2000  on  the  goods  saved  and  loses  $200  on  the  goods  jettisoned; 
the  rest  of  the  cargo  is  C's  and  is  valued  at  $43,000. 

Loss  :  $4800  +  $200  =  $5000. 

Contributors  :  $4800  4-  $200  4-  $52,000  4-  $43,000  =  $100,000. 

Percentage  loss  for  each,  5  %. 

B  gets  $4800  —  $240  =  $4560,  of  which  the  ship  pays  $2600  —  $190 
=  $2410,  and  C  pays  $2150. 

This  is  a  rule  in  admiralty  only.  If  B's  building  is  torn  down  to  stay 
the  spread  of  fire,  he  recovers  no  contribution  from  property  thus  saved. 

A  marine  insurer  is  bound  to  make  good  to  the  owners  of 
property  saved  the  contribution  they  pay  to  one  whose  property 
was  sacrificed.  So  also  the  marine  insurer  is  bound  to  pay  in 
full  the  one  whose  goods  were  sacrificed,  and  is  then  subro- 
gated to  his  rights  of  contribution  against  those  whose  property 
was  saved. 

If  the  policy  on  a  vessel  or  goods  is  merely  a  fire  policy 
and  not  a  marine  policy,  the  rule  of  general  average  has  no 
application. 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  72.  Explain  the  system  and  object  of  insurance.  How  did  it 
originate  ?    How  are  premiums  fixed  ? 

73.  Distinguish  between  valued  and  open  policies.  Distinguish  life, 
endowment,  and  term  policies. 

74.  Define  insurance;  insurer;  insured;  premium;  policy;  risk;  insur- 
able interest.  What  is  life  insurance?  What  is  tontine  insurance?  What 
is  accident  insurance?  marine  insurance?  fire  insurance?  casualty  insur- 
ance? guaranty  or  fidelity  insurance  and  its  kinds?  What  is  reinsurance? 
May  the  party  originally  insured  recover  against  the  reinsurer? 

75.  Name  the  characteristics  of  the  insurance  contract.  Is  it  a  wager- 
ing contract?    Is  it  an  indemnity  contract,  and  why?    I  low  much  may  be 


140 


INSURANCE  CONTRACTS  [Ch.  VI] 


recovered?  How  much  in  an  open  marine  policy?  If  one  has  two  policies, 
how  is  the  loss  adjusted?  What  is  subrogation?  May  one  recover  insur- 
ance on  his  building  burned  by  his  own  negligence  ?  If  the  insured  com- 
mits suicide,  may  his  estate  recover  on  the  policy?  May  an  insurance 
contract  be  by  parol? 

76.  What  is  an  insurable  interest  in  property?  Illustrate.  What  is  an 
insurable  interest  in  a  life?  Illustrate.  When  and  for  how  long  must  the 
insurable  interest  exist? 

Problem  1.  C  owned  a  patent  and  leased  the  exclusive  use  of  it  to  B. 
C  then  insured  the  property  used  by  B  in  order  to  protect  the  claim  for 
royalties  for  the  use  of  the  patent.  B's  property  burned.  The  insurance 
company  claims  C  had  no  insurable  interest  in   B's  property.    Result? 

Problem  2.  C  is  a  stockholder  in  a  corporation.  He  insures  the  cor- 
porate property,  which  afterwards  burns.     Had  he  an  insurable  interest? 

Problem  3.  An  uncle  insured  his  nephew's  life.  Upon  the  nephew's  death 
the  insurance  company  resisted  payment  of  the  policy  upon  the  ground  that 
the  uncle  had  no  insurable  interest  in  the  nephew's  life.     Result? 

77.  In  what  important  respect  do  insurance  contracts  differ  from  ordi- 
nary contracts  ?  What  is  the  duty  of  the  insured  as  to  disclosures  ?  How  has 
the  rule  been  modified?  What  are  representations?  What  are  promissory 
representations?    Effect  of  innocent  representations? 

Problem  4.  C's  building  is  threatened  from  a  neighboring  fire.  He  at 
once  secures  insurance  on  it,  concealing  the  danger.  Is  the  policy  binding 
on  the  insurance  company  ? 

Problems-  C  secured  insurance  on  the  life  of  X.  No  information  con- 
cerning X's  habits  was  asked  or  given,  but  other  questions  were  asked  and 
truthfully  answered.  X  was  to  C's  knowledge  very  intemperate.  Is  the 
policy  binding  on  the  insurance  company? 

Problem  6.  C  secures  insurance  on  a  vacant  building  and  states  orally 
that  it  will  be  occupied.  It  is  not  occupied,  and  it  burns.  Is  the  insurance 
company  liable  ? 

78.  What  is  a  warranty?  How  does  it  differ  from  warranty  in  a  con- 
tract of  sale?  How  must  it  be  fulfilled  ?  Distinguish  it  from  representation. 
What  is  a  waiver?  What  is  an  estoppel?  What  is  the  effect  of  a  breach 
of  representation  or  of  warranty  ? 

Problem  7.  C  in  the  written  application  for  insurance  on  his  building 
(which  becomes  a  part  of  the  policy)  states  that  "  there  is  a  watchman 
nights."  The  fire  occurred  on  Sunday  morning  before  daylight  when  there 
was  no  watchman.  C  tries  to  show  a  custom  not  to  keep  watchmen  after 
twelve  o'clock  Saturday  night.  Should  he  be  permitted  to  do  so?  Is  the 
warranty  broken  ? 


REVIEW  QUESTIONS  AND  PROBLEMS  141 

Problem  8.  C  represents  his  building  as  "occupied  as  a  dwelling  house." 
(a)  It  is  in  fact  vacant.  Is  the  insurance  valid?  (b)  It  is  occupied  when 
insured,  but  afterwards  becomes  vacant.  Two  days  later  it  burns.  May  C 
recover  the  insurance? 

79.  What  is  the  standard  policy?  Must  it  be  used?  How  are  its  terms 
fixed? 

80.  What  three  implied  warranties  in  marine  insurance?  What  is 
general  average?    What  is  jettison? 

Problem  g.  (a)  B's  cargo  is  worth  $29,000  ;  the  freight  to  be  paid  on  it 
is  $1000.  B's  goods  are  thrown  overboard  to  save  a  ship  in  a  storm.  The 
ship  and  the  rest  of  the  cargo  are  saved.  The  ship  is  worth  $50,000  and 
earns  on  the  voyage  $2000  net  freight  (not  including  that  on  B's  goods). 
C's  goods  are  worth  $33,000  and  D's  are  worth  $35,000.  Figure  the  gen- 
eral average  and  how  much  B  will  receive  and  how  much  he  will  lose  ;  how 
much  the  ship  will  receive  and  how  much  it  will  lose,  (b)  In  case  B's  goods 
are  fully  insured  and  the  insurance  is  paid  him,  what  are  the  rights  of  the 
insurance  company  ? 


PART   III 

PARTICULAR    CONTRACTS    CONCERNING 
CREDITS 

CHAPTER  VII 
CREDITS   AND   LOANS 

81.   Capital  and  credit ;   money  and  exchange  ;  payment.    In 

the  conduct  of  a  business  it  is  necessary  to  consider  the  sub- 
jects of  capital,  credit,  money,  exchange,  and  the  mode  and 
effect  of  payments. 

i.  Capital.  In  any  business  enterprise  capital  is  the  total 
amount,  measured  in  money,  that  is  invested  in  the  business. 
This  capital  sum  is  divided  into  that  which  goes  to  provide  a 
business  plant,  equipment,  stock,  etc.,  and  that  which  remains 
in  available  cash  after  these  are  installed.  The  latter  is  the 
working  capital,  for  the  equipment  and  stock  must  be  kept 
intact,  or  if  stock  is  sold,  as  in  merchandising,  it  must  be 
replaced  in  order  that  the  business  may  go  on.  The  working 
capital  should  be  sufficient  to  enable  the  business  to  be  carried 
on  when  collections  are  slow  or  when  debtors  become  insolvent. 
Some  of  it  may  be  invested  in  live  interest-bearing  securities 
which  in  case  of  need  can  be  quickly  sold  or  used  as  collateral 
security  for  temporary  loans. 

An  individual,  partnership,  or  corporation  starts  a  manufacturing  busi- 
ness. The  plant  and  equipment  cost  #100,000.  The  annual  manufactured 
product  amounts  to  #1,500,000.  It  costs  #600,000  for  raw  material  and 
#800,000  for  labor,  repairs,  insurance,  and  other  expenses,  leaving  an 
annual  profit  of  #100,000.    How  much  working  capital  should  there  be  over 

143 


144  CREDITS  AND  LOANS  [Ch.  VII 

and  above  the  plant  and  equipment?  This  will  depend  upon  the  readiness 
of  sales  and  collections,  and  other  considerations.  But  if  the  manufacturer 
wishes  to  be  able  to  carry  on  his  business  for  three  months  with  practically 
no  income,  he  must  have  one  quarter  of  his  total  annual  cost  of  operation, 
namely,  $350,000.  There  would  then  be  invested  $450,000,  with  an  annual 
profit  of  about  $100,000,  or  say  on  the  average  20  per  cent. 

2.  Credit.  Credit  consists  in  the  ability  to  secure  some  present 
benefit  under  an  agreement  that  the  return  therefor  shall  be 
postponed  to  some  future  day,  —  as  the  ability  to  borrow  money 
or  obtain  goods  or  services  to  be  paid  for  thereafter.  It  is  the 
result  of  the  favorable  opinion  of  the  mercantile  community  or 
of  the  particular  lender  or  seller  as  to  the  solvency,  honesty, 
and  business  capacity  of  the  borrower  or  buyer.  Commercial 
agencies  publish  periodical  estimates  of  the  ability  of  business 
concerns  to  meet  credit  obligations,  and  these  are  largely  used 
by  those  who  are  requested  to  extend  such  credit.  The  two 
principal  agencies  in  this  country  are  Bradstreet's  and  Dun's. 
Every  business  man  needs  credit,  and  his  rating  in  these  publi- 
cations is  of  great  importance  to  him.  If  he  gives  false  informa- 
tion in  order  to  secure  credit,  he  may  be  liable  in  deceit  to 
any  one  injured  thereby.  If  false  information  is  given  in  the 
publications,  injurious  to  his  credit,  he  may  have  an  action 
against  the  agency  for  damages.  Should  the  agency  through 
nefflieence  sfive  false  information  to  the  subscribers  about  the 
credit  of  a  person  rated,  and  if  one  of  the  subscribers  by  extend- 
ing credit  on  the  strength  thereof  should  suffer  a  loss,  the 
agency  might  be  liable  to  the  subscriber. 

Good  credit  is  of  the  first  importance  to  a  business  man. 
Whether  he  wishes  to  borrow  money  or  to  purchase  goods  on 
deferred  payments  he  must  have  the  reputation  of  possessing 
the  ability  and  inclination  to  meet  promptly  his  pecuniary  obli- 
gations. Often  he  must  give  security  which  may  take  the  form 
of  a  pledge  of  things  of  value,  like  bonds,  or  of  a  mortgage  on 
property,  or  of  a  guaranty  by  some  third  person.  If  one  borrows 
money  at  a  bank,  he  may  be  required  to  have  his  note  indorsed 
by  one  or  more  persons  who  are  known  as  accommodation 
indorsers. 


§8 1]  CAPITAL,  CREDIT,  AND  MONEY  1 45 

Aside  from  the  credit  system  above  mentioned  there  is  a  system  of  using 
credit  temporarily  in  place  of  money  for  present  payments.  This  is  by 
issuing  checks.  Including  these,  the  larger  part  of  the  business  of  the 
country  is  done  on  credit,  and  money  is,  after  all,  only  an  auxiliary  to  it. 
Enormous  transactions  take  place  without  the  actual  transfer  of  a  dollar  in 
cash.  Every  day  the  New  York  clearing  house  meets  to  strike  the  balance 
among  the  banks  belonging  to  it.  If  bank  A  presents  checks  which  it 
has  received  against  banks  B,  C,  D,  etc.,  to  the  amount  of  $1,125,382,  and 
if  all  the  banks  combined  present  checks  which  they  have  received  against 
bank  A  to  the  amount  of  $1,315,460,  then  bank  A  owes  the  clearing  house 
$190,078.  If  bank  B  presents  checks  against  banks  A,  C,  D,  etc.,  to  the 
amount  of  $1,847,625,  and  they  present  checks  against  it  to  the  amount  of 
$1,620,347,  then  the  clearing  house  owes  bank  B  $227,278.  In  this  way 
the  balances  are  struck  and  the  clearing  house  receives  the  cash  from 
the  debtor  banks  and  pays  it  out  to  the  creditor  banks,  being  at  the  close 
of  the  transaction  not  a  penny  richer  or  poorer.  But  while  there  is  an 
average  of  about  $200,000,000  of  checks  thus  passed  through  the  clearing 
house  daily,  only  about  5  per  cent  of  cash  balances  is  paid  in  and  paid  out. 
Thus  95  per  cent  of  the  business  is  done  by  a  system  of  check  credits. 

Even  banks  themselves  sometimes  need  credit  in  order  to  meet  their 
obligations.  Upon  depositing  with  the  clearing  house  its  bills  receivable 
or  other  securities,  a  bank  may  obtain  clearing-house  certificates  to  75  per 
cent  of  the  par  value  of  the  securities,  and  these  certificates  will  be  received 
by  the  clearing  house  in  payment  of  balances.  In  times  of  panic  these 
clearing-house  certificates  may  enable  a  bank  to  avoid  a  suspension  of  pay- 
ments.   The  certificate  simply  states  that Bank  has  deposited  securities, 

and  the  certificates,  each  for  $5000,  based  thereon  will  be  received  in  pay- 
ment for  balances  at  the  clearing  house. 

3.  Money.  Money  has  two  meanings.  In  the  general  sense 
it  means  whatever  has  currency  as  money  in  payment  of  debts ; 
this  is  called  currency,  or  current  funds.  In  a  more  restricted 
sense  it  means  whatever  is  legal  tender  in  the  payment  of  debts, 
that  is,  money  which  a  creditor  must  receive ;  this  is  called 
legal-tender  money. 

There  are  ten  different  kinds  of  current  money  in  circulation 
in  the  United  States. 

1.  Gold  coin,  now  coined  in  denominations  of  $2.50,  $5,  $10,  and  $20, 
called  respectively  quarter  eagles,  half  eagles,  eagles,  and  double  eagles. 
An  eagle  weighs  258  grains,  of  which  /^  is  gold  and  TV  alloy.  The  others 
weigh  proportionally.  These  coins  are  full  legal-tender  money  to  any 
amount. 


I46  CREDITS  AND  LOANS  [Ch.  VII 

2.  Standard  silver  dollars.  A  silver  dollar  weighs  41  z\  grains,  of  which  T% 
is  silver  and  TJo  alloy.  These  are  full  legal  tender  to  any  amount,  unless 
otherwise  expressly  stipulated  in  the  contract. 

3.  Subsidiary  silver,  namely,  half  dollars  (192.9  grains),  quarter  dollars 
(96.45  grains),  dimes  (38.58  grains),  all  T%  silver  and  TV  alloy.  These  are 
legal  tender  for  amounts  not  exceeding  $10  in  any  one  payment. 

4.  Nickel  coin,  namely,  the  five-cent  piece,  weighing  77.16  grains,  of 
which  T7o5o  is  copper  and  T%55   nickel. 

5.  Bronze  coin,  namely,  the  one-cent  piece  weighing  48  grains,  of  which 
f>_5_  is  copper  and  T§o  tin  and  zinc.  These  minor  coins  (nickel  and  cent)  are 
legal  tender  for  amounts  not  exceeding  25  cents  in  any  one  payment. 

6.  United  States  notes  ("greenbacks").  These  are  full  legal  tender 
except  for  duties  on  imports  and  interest  on  the  public  debt. 

7.  Treasury  notes  of  Act  of  1890.  These  are  full  legal  tender  except 
when  otherwise  expressly  stipulated  in  the  contract. 

8.  Gold  certificates  issued  against  gold  and  bullion  deposited  in  the 
United  States  Treasury.  These  are  not  legal  tender,  but  are  receivable  for 
all  public  dues. 

9.  Silver  certificates  issued  against  silver  dollars  deposited  in  the  Treasury. 
These  have  practically  taken  the  place  of  the  silver  dollars  for  general  circu- 
lation.   They  are  not  legal  tender,  but  are  receivable  for  public  dues. 

10.  National-bank  notes,  issued  by  national  banks  against  United  States 
bonds  deposited  in  the  United  States  Treasury.  These  are  not  legal  tender, 
but  are  receivable  for  all  public  dues  except  duties  on  imports ;  and  one 
national  bank  is  bound  to  receive  the  notes  of  other  national  banks. 

Of  course,  gold  certificates  and  silver  certificates  do  not  increase  the 
volume  of  money.  They  simply  represent  so  much  coined  money  (or  gold 
bullion)  which  is  held  for  their  redemption,  and  they  circulate  instead  of 
the  less  convenient  coin.    They  are  a  kind  of  warehouse  receipt  for  money. 

4.  Exchange.  Exchange  is  a  method  by  which,  without  the 
actual  sending  of  money,  debts  may  be  paid  at  distant  points. 
A  claim  or  credit  one  living  in  New  York  has  against  a  debtor 
in  London  may  be  used  to  pay  a  debt  one  owes  in  London,  or 
it  may  be  sold  to  another  debtor  in  New  York  and  used  by 
him  to  pay  his  creditor  in  London.  A  bank  in  New  York 
may  keep  a  credit  with  a  bank  in  London  and  so  be  able  to 
sell  to  New  York  debtors  its  checks  on  the  London  bank 
with  which  the  New  York  debtors  may  pay  their  London 
creditors.  It  is,  of  course,  far  cheaper  and  safer  to  send  to 
London  an  order  on  a  London  merchant  or  a  London  bank, 
than  to  send  gold  coin. 


§8i]  EXCHANGE  1 47 

Example.  B  in  New  York  sells  to  C  in  London  cotton  to  the  amount  of 
,£600,  and  draws  a  bill  of  exchange  (order  for  money)  on  C  payable  to  B's 
order  sixty  days  after  sight  for  that  amount,  (a)  B  may  sell  this  bill  to  a 
banker  or  bill  broker  in  New  York.  If  D  in  New  York  owes  E  in  London 
/boo,  D  may  buy  this  bill  of  the  broker  and  send  it  to  E,  who  presents  it 
in  London  to  C  and  gets  his  money.  (&)  B  may  discount  the  bill  at  his 
bank  in  New  York.  The  bank  may  send  it  and  other  like  bills  to  its  corre- 
spondent bank  in  London  and  thus  get  a  credit  there.  D  may  purchase  of 
the  New  York  bank  its  bill  of  exchange  on  the  London  bank  and  send  this 
to  E,  who  presents  it  at  the  London  bank  and  gets  his  money. 

Domestic  exchange  is  that  between  different  parts  of  the 
same  country.  It  is  sold  by  banks,  express  companies,  tele- 
graph companies,  and  even  by  the  government  in  the  form  of 
post-office  money  orders. 

Foreign  exchange  is  between  a  city  in  one  country  and  a  city 
in  another  country.  It  is  of  two  kinds  :  (a)  bankers'  bills,  that 
is,  bills  of  exchange  or  checks  drawn  by  one  bank  on  another ; 
(&)  commercial  bills,  that  is,  bills  of  exchange  drawn  by  one 
merchant  (creditor)  upon  another  merchant  (debtor).  The  latter 
may  be  drawn  against  a  shipment  of  goods  and  be  accompanied 
by  the  bill  of  lading,  in  which  case  they  are  called  "docu- 
mentary" ;  or  they  may  be  without  accompanying  documents  of 
title,  in  which  case  they  are  called  "  clean  bills." 

Foreign  exchange  must  be  reckoned  in  the  money  of  the 
country  on  which  the  bill  is  drawn.  There  is  a  par  of  exchange 
fixed.  Thus  an  English  pound  sterling  is  equal  to  $4.8665 
American  money.1  There  may  be,  however,  a  slight  premium 
or  a  slight  discount  equal  approximately  to  the  actual  cost  of 
shipping  gold,  which  is  about  |  of  1  per  cent  on  the  amount 
shipped.  As  this  is  scarcely  2  cents  on  $4.8665,  the  premium 
or  discount  will  rarely  be  more  than  2.X  cents. 

To  the  natural  rate  fixed  by  the  par  of  exchange,  with  pre- 
mium or  discount,  is  added  the  commercial  rate,  depending  on 
the  abundance  or  scarcity  of  commercial  bills  and  the  price 
fixed  for  accommodating  a  person  in  New  York  with  a  bill  of 
exchange  on  London  or  any  other  foreign  city.    If  exchange  is 

1  The  United  States  Treasury  will,  on  application,  send  an  official  Table  of 
Values  of  Foreign  Coins. 


I48  CREDITS  AND  LOANS  [Ch.  VII 

at  par,  one  in  New  York  could  not  buy  a  bill  on  London  for 
;£ioo  for  $486.65,  but  would  have  to  pay  an  added  percentage. 
"  Exchange  "  is  often  used  in  the  sense  of  the  added  price  paid 
for  such  a  bill. 

5.  Payment.  Payment  is  the  discharge  of  a  debt  in  money  or 
its  equivalent.  It  is  the  duty  of  the  debtor  to  seek  out  his 
creditor  and  tender  payment  at  the  proper  time.  It  is  not  the 
duty  of  the  creditor  to  give  a  receipt  unless  the  statute  so  pro- 
vides, but  it  is  customary  to  do  so.  The  tender  to  be  legally 
and  technically  correct  must  be  of  the  exact  amount  in  legal- 
tender  money.  If  the  creditor  refuses  a  lawful  tender,  his 
refusal  has  the  effect  of  stopping  interest  upon  the  debt,  and, 
if  the  tender  be  kept  good,  of  preventing  costs  in  case  he  resorts 
to  legal  process  to  collect  the  debt. 

If  the  debtor  owes  the  creditor  different  debts,  he  may  direct 
that  a  payment  be  applied  toward  the  extinguishment  of  any 
one  of  them  he  may  select.  If  the  debtor  makes  no  applica- 
tion, the  law  will  apply  the  payment  in  a  manner  deemed  most 
equitable  and  just  to  both  parties. 

A  receipt,  when  given,  is  strong  but  not  conclusive  evidence 
that  the  sum  named  in  it  has  been  paid.  It  may  be  impeached 
for  mistake  or  fraud. 

As  stated  above,  the  larger  part  of  the  payments  in  the 
commercial  world  are  now  made  by  the  use  of  checks  or  bills 
of  exchange,  while  money,  save  in  the  case  of  small  transac- 
tions, is  used  mainly  to  settle  balances  at  the  clearing  house 
or  between  foreign  cities. 

82.  Interest  and  usury.  Interest  is  the  compensation  allowed 
by  law  or  fixed  by  the  parties  for  the  use  or  forbearance  or 
detention  of  money. 

Legal  interest  is  the  rate  of  interest  allowed  by  law.  Parties 
may  agree  for  less  than  this,  but  not  for  more  unless  a  higher 
rate  by  special  agreement  is  permitted  by  statute.  If  they 
agree  for  interest  with  no  rate  specified,  the  legal  rate  will  be 
understood.  In  many  states  a  legal  rate  is  fixed  for  cases 
where  there  is  no  specific  agreement,  and  a  maximum  rate  for 
cases    where    there    is    an    agreement.     These    statutes    often 


§S2]  INTEREST  AND  USURY  149 

provide  that  an  agreement  for  a  rate  higher  than  the  legal  rate 
but  within  the  maximum  rate  shall  be  in  writing.1 

Usury  is  unlawful  interest,  that  is,  an  agreement  for  interest 
greater  than  that  allowed  by  law.  Such  a  contract  is  illegal, 
but  the  effect  of  such  illegality  varies  in  different  jurisdictions. 
In  some  the  lender  cannot  recover  any  interest  at  all ;  in  some 
he  can  recover  neither  principal  nor  interest;  in  some  he  forfeits 
only  an  excess  above  the  specified  rate. 

In  England,  Massachusetts,  and  some  other  jurisdictions  no 
maximum  rate  of  interest  is  specified  by  statute,  and  parties 
may  contract  freely  concerning  the  rate,  except  that  an  uncon- 
scionable rate  might  be  evidence  of  oppression  or  undue  influ- 
ence. In  most  American  states  the  rate  is  fixed  by  statute, 
ranging  from  6fo  to  i2fo,  and  any  agreement  for  interest  above 
that  rate  would  be  usurious  and  illegal ;  but  some  of  these 
states  allow  corporations  to  contract  to  pay  any  rate  of  inter- 
est agreed  upon,  and  some  allow  banks  to  make  large  call  loans 
upon  negotiable  security  at  any  rate  agreed  upon.  The  object 
of  fixing  the  maximum  rate  is  to  avoid  oppression  of  borrowers, 
and  it  is  thought  that  corporations  and  dealers  upon  stock 
exchanges  (who  secure  call  loans)  are  not  likely  to  be  subject 
to  such  oppression  and  should  be  left  free  to  contract  for  any 
rate  they  may  think  the  loan  worth  to  them.  Special  rates, 
higher  than  ordinary  rates,  are  also  usually  allowed  to  be 
charged  by  pawnbrokers. 

Up  to  the  time  a  debt  becomes  clue  and  payable  there  is  no 
interest  allowed  upon  it  unless  the  parties  have  provided  for 
interest. 

A  sale  of  goods  for  $500  upon  sixty  days'  credit  would  carry  no  interest 
during  the  sixty  days  unless  it  was  provided  that  the  credit  should  be  "  with 
interest."  So  a  negotiable  promissory  note  carries  no  interest  until  maturity 
unless  interest  is  specified  in  the  note.  All  debts  bear  interest  after  they  are 
due  and  payable,  such  interest  being  regarded  as  a  measure  of  damages  for 
the  wrongful  detention  of  the  money. 

Compound  interest  is  not  favored  in  the  law  and  will  be 
allowed  only  when  the  interest  due  has  by  some  new  agreement 

1  See  Interest  Table  at  end  of  this  chapter. 


I50  CREDITS  AND  LOANS  [Ch.  VII 

been  incorporated  with  the  principal  or  where  expressly  con- 
tracted for  in  the  original  agreement. 

Example.  B  agrees  to  pay  C  $1000  three  years  from  date  with  interest 
at  6%  per  annum,  payable  annually.  B  pays  no  interest  and  the  three  years 
have  elapsed.  C  may  recover  the  principal  with  simple  interest,  namely, 
$1 180  (plus  also  interest  from  maturity  to  the  date  of  the  judgment).  After 
judgment  C  is  allowed  interest  on  the  total  judgment  debt  at  the  legal  rate. 

83.  Banks.  Banks  are  financial  institutions  which  receive 
money  on  deposit,  loan  money,  sometimes  issue  money,  deal  in 
commercial  paper,  and  facilitate  exchange.  There  are  several 
kinds  of  banks  in  this  country. 

National  banks  are  chartered  by  the  United  States  govern- 
ment with  power  to  issue  national  bank-notes  upon  depositing 
as  security  therefor  United  States  bonds.  They  are  banks  of 
deposit,  discount,  and  loans,  doing  a  general  banking  business. 
They  may  charge  the  rate  of  interest  which  the  state  where 
they  are  located  has  fixed  for  its  own  state  banks.  The  penalty 
for  usury  is  the  recovery  by  the  borrower  of  twice  the  amount 
of  interest  paid.  National  banks  may  be  organized  by  not  less 
than  five  persons.  In  any  place  having  less  than  3000  inhab- 
itants they  must  have  a  capital  stock  of  not  less  than  $25,000; 
in  a  place  of  from  3000  to  6000,  not  less  than  $50,000;  in  a  place 
of  from  6000  to  50,000,  not  less  than  $100,000;  in  a  place  of 
over  50,000,  not  less  than  $200,000.  On  June  30,  1904,  there 
were  5386  national  banks  with  an  aggregate  capital  of  $776,904,- 
335.    On  the  same  date  the  outstanding  national-bank  notes 

amounted  to  $449>235>°95- 

State  banks  are  chartered  by  the  state  in  which  they  are 
located,  and,  like  national  banks,  are  usually  banks  of  deposit, 
discount,  and  loans.  Owing  to  a  national  tax  of  ten  per  cent 
on  all  bank  notes  issued  by  state  banks,  none  of  them  can 
profitably  issue  such  notes. 

Trust  companies  are  chartered  by  states  and  are  given  many 
of  the  powers  of  banks  of  deposit,  and  are  also  authorized  to 
act  as  fiscal  agents,  trustees,  executors,  administrators,  etc. 
When  a  corporation  wishes  to  issue  bonds  secured  by  mort- 
gage  it   usually   selects   a  trust   company  as   trustee   for   the 


§84]  BANK  DEPOSITS  151 

bondholders.  They  often  serve  as  agents  or  trustees  in  the 
organization  or  reorganization  of  corporations.  Trust  compa- 
nies have  increased  greatly  during  the  past  few  years,  and  now 
in  New  York  City  outnumber  the  national  banks.  Their  powers 
are  so  large  as  compared  with  national  or  state  banks  that 
capitalists  find  it  more  profitable  to  invest  in  them  than  in  the 
older  and  more  conservative  institutions.  They  are  also  much 
less  restricted  as  to  investments  and  security  for  loans. 

Savings  banks  are,  as  the  name  implies,  depositories  for 
savings  and  not  ordinary  banks  of  deposit  for  live  accounts. 
They  pay  interest  on  deposits  and  loan  money  on  mortgages  or 
other  permitted  securities  at  a  higher  rate.  They  are  organized 
under  state  laws. 

Private  bankers  are  persons  who  carry  on  a  banking  business 
without  forming  a  corporation.  They  may  unite  with  banking 
proper  a  variety  of  other  enterprises,  and  some  of  the  largest 
financial  operations  are  conducted  through  private  bankers  who 
promote  or  finance  them.  They  often  combine  with  a  banking 
business  that  of  stock  or  bond  brokers. 

If  a  bank  receives  deposits  subject  to  check,  it  usually  allows 
no  interest ;  but  savings  banks,  trust  companies,  and  sometimes 
private  bankers  receive  deposits  not  subject  to  check  and  allow 
interest,  while  national  banks  and  state  banks  generally  do 
not.  A  bank  of  deposit  makes  its  profits  on  loans.  Even  if  it 
pays  interest  it  loans  at  a  higher  rate  than  it  pays.  Loans  of 
banks  of  deposit  are  made  on  indorsed  commercial  paper  or  on 
collateral  security.  National  banks  are  forbidden  to  loan  on 
real-estate  security,  but  savings  banks  and  trust  companies 
loan  on   such  security. 

84.  Bank  deposits.  When  money  is  deposited  in  a  bank  the 
depositor  becomes  the  creditor  of  the  bank  to  the  amount  of 
his  deposit.  In  ordinary  banks  of  deposit  there  is  an  implied 
understanding  that  the  depositor  may  draw  checks  upon  his 
deposits  in  favor  of  third  persons,  and  that  the  bank  will  honor 
them.  There  is  no  such  understanding  in  the  case  of  ordinary 
debtors,  and  the  debtor  is  not  bound  to  honor  any  order  upon 
him  unless  it  be  for  the  full  amount  of  his  debt.    In  savings 


Ic2  CREDITS  AND  LOANS  [Ch.  VII 

banks  and  in  the  case  of  interest-bearing  deposits  in  other 
banks  it  is  usually  provided  that  some  notice  shall  be  given 
of  an  intention  to  withdraw  any  portion  of  the  deposit,  and  that 
the  deposit  book  shall  be  presented  with  the  check  or  order. 
Ordinary  deposits  do  not  bear  interest. 

When  money  is  deposited  in  a  bank  subject  to  check,  the 
depositor  usually  receives  a  bank  book  in  which  each  deposit 
is  entered.  This  constitutes  the  evidence  of  his  credits.  When 
a  check  is  paid  the  bank  keeps  it  and  this  constitutes  the  evi- 
dence of  its  credits  as  against  its  depositor.  The  book  and 
vouchers  (paid  checks)  are  then  returned  to  the  depositor,  who 
should  at  once  examine  each  check  in  order  to  ascertain  that 
it  is  genuine,  and  should  verify  the  account.  If  a  forged  or 
raised  check  has  been  paid,  the  loss  falls  upon  the  bank  as 
between  the  bank  and  the  depositor,  but  unreasonable  delay 
in  examining  the  checks  after  they  are  returned  to  him,  or  in 
notifying  the  bank  of  any  irregularity,  may  estop  the  depositor 
from  asserting  his  rights  in  this  respect. 

A  depositor  may  have  a  note  made  by  him  payable  at  his 
bank.  In  that  case,  when  the  note  falls  due  it  is  equivalent  to 
an  order  upon  the  bank  to  pay  it,  and  it  is  paid  like  a  check 
and  the  note  is  included  as  a  voucher  when  the  account  is 
written  up.  A  depositor  may,  however,  direct  a  bank  not  to 
pay  from  his  deposit  a  note  or  check  which  he  has  made  pay- 
able there.  In  this  event  the  bank  is  bound  to  refuse  payment 
unless  it  is  itself  the  owner  of  the  note,  in  which  case,  as  cred- 
itor to  that  amount,  it  may  offset  the  note  against  what  it  owes 
to  the  depositor. 

Where  one  does  not  wish  to  draw  checks  against  a  deposit 
he  may  take  a  "certificate  of  deposit"  from  the  bank.  This 
is  in  the  form  of  a  receipt  stating  that  "  A.  B.  has  deposited  in 
this  bank  five  hundred  dollars  payable  to  his  order  upon  return  of 
his  certificate,"  and  is  signed  by  the  cashier.  If  certificates  are 
for  a  definite  period,  as  three  months,  they  are  often  made  with 
interest.    They  are  practically  the  promissory  note  of  the  bank. 

85.  Loans  and  discount;  security.  If  one  wishes  to  borrow 
money  for  temporary  use  in  his  business,  he  usually  applies  at 


§8S]  LOANS  AND  DISCOUNT  153 

his  bank  for  a  loan.  Assuming  that  he  wishes  to  borrow  $1000, 
he  would  make  his  promissory  note  for  that  amount  (with  or 
without  security),  payable  at  a  specified  time  after  date,  and 
the  bank  would  discount  it  and  place  the  amount  less  the 
discount  to   his  credit. 

Discount  is  the  taking  of  interest  in  advance  upon  a  loan  ; 
it  is  incidental  to  banking,  and  bank  discount  is  not  usury, 
although  the  lender  may  thereby  secure  slightly  more  than  the 
legal  rate.  It  is  technically  discounting  one's  own  commercial 
paper  in  order  to  raise  money. 

Discount  is  also  used  in  the  sense  of  purchasing  for  their 
present  worth,  or  for  less,  notes  made  by  one  person  and  owned 
by  another. 

Examples.  B  wishes  to  raise  money.  He  owns  a  note  made  by  C ;  he 
sells  this  note  to  D.  If  he  sells  it  for  its  present  worth,  there  could  be  no 
question  in  any  event  of  the  validity  of  the  transaction.  But  if  he  sells  it 
for  less  than  its  present  worth,  the  buyer  will  make  a  profit  greater  than  the 
legal  rate  of  interest.  This,  however,  is  not  essentially  usurious,  any  more 
than  to  buy  a  horse  and  make  a  profit  upon  it.  If  B  does  not  indorse  the 
note  so  as  to  become  liable  upon  it  himself,  the  sale  may  be  for  any  price 
agreed  upon.  If  B  does  indorse  it,  most  courts  still  hold  that  the  sale  (if 
not  a  mere  cover  for  usury)  may  be  for  any  price  agreed  upon,  although 
some  courts  hold  this  to  be  usurious  if  the  buyer  makes  thereby  more  than 
the  legal  rate  of  interest. 

In  no  case  may  a  bank  discount  or  purchase  notes  at  a  greater  discount 
than  the  legal  rate  of  interest.  This  limitation  upon  banks  has  created  a 
class  of  dealers  known  as  bill  brokers,  or  popularly  as  "  note  shavers,"  who 
purchase  such  instruments  at  an  agreed  price  for  themselves  or  for  other 
persons. 

If  one  in  borrowing  money  has  to  give  security,  this  may  be 
done  by  getting  another  person  to  indorse  or  guaranty  his  note, 
or  by  depositing  collateral  in  the  form  of  a  pledge,  or  by  giving 
a  mortgage  upon  property.  When  there  is  an  accommodation 
indorser  the  note  is  usually  made  payable  to  him,  indorsed  by 
him,  and  discounted  at  the  bank  by  the  accommodated  party.  If 
it  is  not  paid  by  the  maker  when  it  is  due,  the  indorser  is  noti- 
fied and  he  is  then  liable  to  pay  it.  If  the  note  is  guarantied, 
it  is  made  payable  to  the  bank,  and  the  guaranty  is  written 


154 


CREDITS  AND  LOANS 


[Ch.  VII] 


upon  the  back  and  signed  by  the  guarantor.  Upon  nonpayment 
by  the  maker,  the  guarantor  is  liable  without  notice.  Pledge 
of  collateral  security  has  already  been  treated  (see  sec.  65  ante). 
A  mortgage  is  in  form  a  conveyance  of  property  upon  condition 
that  if  a  specified  sum  be  paid  to  the  mortgagee  at  a  specified 
date  the  mortgage  shall  be  void  and  of  no  further  effect. 


Interest  Table 

The  following  table  shows  the  ordinary  legal  rate  of  interest  and  the 
maximum  rate  by  special  agreement  in  each  state  and  territory.  The  special 
agreement  must  in  most  states  be  in  writing. 


State,  etc. 

Legal 
Rate 

Maximum 
Rate 

State,  etc. 

Legal 
Rate 

Maximum 
Rate 

Alabama      .... 

S 

8 

Montana    .     .     . 

8 

Any  rate 

Alaska     

8 

12 

Nebraska  . 

7 

IO 

Arizona  

6 

Any  rate 

Nevada      .     .     . 

7 

Any  rate 

Arkansas     .... 

6 

10 

New  Hampshire 

6 

6 

California    .... 

7 

Any  rate 

New  Jersey    .     . 

6 

6 

Colorado      .... 

8 

Any  rate 

New  Mexico  .     . 

6 

12 

Connecticut      .     .     . 

6 

Any  rate 

New  York 

6 

6 

Delaware      .... 

6 

6 

North  Carolina 

6 

6 

District  of  Columbia 

6 

10 

North  Dakota 

7 

12 

Florida 

S 

10 

Ohio       .     .     . 

6 

8 

Georgia 

7 

8 

Oklahoma 

7 

12 

Idaho       

7 

12 

Oregon       .     . 

6 

10 

Illinois 

5 

7 

Pennsylvania 

6 

6 

Indian  Territory  .     . 

6 

10 

Rhode  Island 

6 

Any  rate 

Indiana 

6 

8 

South  Carolina 

7 

8 

Iowa 

6 

8 

South  Dakota 

7 

12 

Kansas 

6 

10 

Tennessee  . 

6 

6 

Kentucky     .     .     .     . 

6 

6 

Texas     . 

6 

10 

Louisiana     .     .     .     . 

5 

8 

Utah      .     .     . 

S 

Any  rate 

Maine 

6 

Any  rate 

Vermont    . 

6 

6 

Maryland      .     .     .     . 

6 

6 

Virginia      .     . 

6 

6 

Massachusetts       .     . 

6 

Any  rate 

Washington    . 

6 

12 

Michigan      .     .     .     . 

5 

7 

West  Virginia 

6 

6 

Minnesota    .     .     .     . 

6 

10 

Wisconsin 

6 

10 

Mississippi  .     .     .     . 

6 

10 

Wyoming  .     . 

8 

12 

Missouri 

6 

8 

- 

REVIEW  QUESTIONS  AND  PROBLEMS  155 


REVIEW  QUESTIONS  AND   PROBLEMS 

Section  81.  What  is  capital  ?  What  is  working  capital  ?  What  is  credit  ? 
How  is  it  estimated  ?  How  are  checks  used  for  credit  purposes  ?  Explain  the 
methods  of  a  clearing  house.  What  is  a  clearing-house  certificate?  What 
is  money?  What  is  currency?  What  is  legal  tender?  State  the  kinds 
of  United  States  money.  Which  are  legal  tender  and  to  what  amount? 
What  is  exchange?  What  two  kinds  of  foreign  exchange?  What  sends 
foreign  exchange  above  par  or  below  par?  What  is  the  natural  limit  of 
such  fluctuation  ?  What  determines  the  commercial  price  of  exchange  ? 
What  is  payment?  What  is  the  effect  of  refusing  it?  How  is  it  applied 
if  there  be  different  debts?  Must  the  creditor  give  a  receipt?  What  is  its 
effect? 

Problem  1.  B  owes  C  $32.  B  tenders  C  silver  in  payment  as  follows: 
15  silver  dollars,  20  half  dollars,  25  quarter  dollars,  7  dimes,  1  nickel. 
C  refuses  to  accept  this,  alleging  it  is  not  legal  tender.  C  then  sues  B,  and 
to  avoid  costs  and  interest  B  pleads  the  prior  tender.    Result? 

Problem  2.  B  owes  C  a  debt  for  $25  contracted  in  189S,  and  one  of  $36 
contracted  in  1901.  B  in  1903  pays  C  £25  and  directs  C  to  credit  it  on  the 
debt  of  $36.  C  credits  it  on  the  debt  for  $25.  In  1905,  after  the  debt  for 
$25  is  "outlawed,"  C  sues  B  for  $36.  B  pleads  payment  of  $25.  How 
much  may  C  recover  ? 

Problem  3.  In  above  case  B  makes  no  request  as  to  application  of  pay- 
ment.   How  will  it  be  applied? 

82.  What  is  interest?  What  is  usury?  What  is  the  effect  of  usury  upon 
a  contract?  What  is  the  legal  rate  and  the  maximum  rate  of  interest  in 
your  state?  What  debts  carry  interest?  What  is  compound  interest?  When 
is  it  allowed? 

Problem  4.  B  bought  goods  of  C  to  the  amount  of  $215  on  three  months' 
credit  which  expired  July  7.  On  September  3  C  brought  suit  in  New  York 
against  B  for  this  debt.  On  November  10  a  judgment  was  entered  for  C. 
On  January  1 5  this  judgment  was  paid,  (a)  Assuming  that  the  disbursements 
and  costs  allowed  C  by  the  court  amounted  to  524.25,  how  much  should  the 
judgment  be  entered  for?  (b)  How  much  would  be  paid  to  discharge  it  on 
January  15  ? 

Problem  3.  B  borrows  of  C  in  New  York  $100  for  one  year,  and  gives 
his  promissory  note  for  that  amount  with  6%  interest.  In  addition  15  pays 
C  a  bonus  of  $5,  that  is,  C  really  pays  over  to  B  on  the  loan  only  $95. 
C  sues  B  on  this  note.    B  pleads  usury.    Result? 

Problem  6.  In  the  above  case  B  is  a  corporation.    Result? 


I56  CREDITS  AND  LOANS  [Ch.VII] 

83.  What  is  a  bank?  Name  and  describe  the  different  kinds  of  banks. 
How  much  capital  must  a  national  bank  have  in  your  city  or  village  ?  Is 
there  a  state  bank  there  ?  a  savings  bank  ?  a  trust  company  ?  a  private 
banker  ?  What  advantages  have  trust  companies  over  state  or  national 
banks  ?  What  are  live  accounts  ?  What  banks  take  deposits  and  allow 
interest  ? 

84.  What  is  the  relation  of  a  bank  to  a  depositor?  Who  loses  the 
money  paid  by  a  bank  upon  a  forged  check?  If  one  has  a  note  due  and 
payable  at  a  bank,  explain  what  is  done  on  the  due  date.  What  is  a  cer- 
tificate of  deposit  ? 

85.  Explain  the  process  of  borrowing  money  at  a  bank.  What  is  dis- 
count? How  great  may  it  be?  What  is  purchasing  a  note?  For  what 
price  may  a  bank  purchase  a  note  made  by  X  and  owned  by  A  ?  For  what 
price  may  an  individual  purchase  it?  In  what  forms  may  one  give  security 
for  a  loan  ?    What  is  a  mortgage  ? 


CHAPTER  VIII 

THE  CONTRACT  OF  GUARANTY 

86.  Guaranty  defined.  A  guaranty  :  is  a  promise  to  be  answer- 
able for  another's  debt,  default,  or  obligation.  It  is  a  contract 
collateral  to  the  main  contract  of  the  principal  party 

Example.  B  purchases  goods  of  C  on  credit ;  D  gives  C  a  guaranty 
that  B  will  pay  for  them,  or  in  case  B  does  not  that  D  will. 

The  guarantor  is  he  who  gives  the  guaranty.  The  guarantee 
is  he  to  whom  the  guaranty  is  given,  that  is,  the  creditor.  The 
principal  is  he  whose  debt  is  guarantied,  that  is,  the  debtor. 
The  word  surety  is  sometimes  used  interchangeably  for  guar- 
antor. But  strictly  a  surety  is  one  who  is  bound  with  the  prin- 
cipal upon  the  original  contract  and  in  the  same  terms,  while  a 
guarantor  is  bound  upon  a  collateral  contract  to  make  good  in 
case  the  principal  fails. 

"  We,  A.  B.  as  principal  and  C.  D.  as  surety,  hereby  agree,  etc.,"  would  be 
a  case  of  suretyship  ;  while  "  I,  A.  B.,  hereby  agree,  etc.,"  followed  by  the 
indorsement,  "  I  hereby  guaranty  2  the  performance  or  payment  of  the  within 
contract.     C.  D.,"  would  be  a  case  of  guaranty. 

An  indorsement  of  a  negotiable  instrument  is  a  special  form  of  guaranty, 
the  indorser  promising  that  he  will  be  answerable  for  the  amount  of  the 
note  in  case  the  holder  makes  due  presentment  to  the  maker,  gives  due 
notice  of  dishonor  to  the  indorser,  and  in  case  of  a  foreign  bill  of  exchange 
makes  due  protest.  This  is  considered  under  the  head  of  Negotiable 
Instruments. 

1  This  is  the  same  word  as  warranty,  having  preserved  the  Norman-French  g 
which  has  been  converted  into  the  English  w  in  warranty,  as  the  French  Guillaume 
becomes  William  in  English.  A  warranty  is  a  guaranty  of  the  title  or  quality  of 
goods.  A  guaranty  is  a  warranty  of  credit,  solvency,  etc.  (see  Guaranty  Insurance, 
sec.  74  ante). 

2  The  verb  is  either  "  guaranty  "  or  "  guarantee."  Sometimes  one,  sometimes 
the  other,  is  used.    So  also  the  noun  is  written  in  both  forms. 

lh7 


I58  GUARANTY  [Ch.  VIII 

A  guaranty  of  payment  differs  from  a  guaranty  of  collection. 
In  the  first  case  the  guarantor  agrees  to  pay  if  the  principal 
does  not ;  in  the  second  he  agrees  to  pay  if  the  debt  cannot  be 
collected  of  the  principal. 

A  continuing  guaranty  is  an  agreement  to  be  responsible  for 
moneys,  goods,  or  services  to  be  furnished  the  principal  from 
time  to  time  in  the  future. 

87.  A  guaranty  must  be  in  writing.  Under  the  Statute  of 
Frauds  (see  sec.  22  ante)  a  promise  to  answer  for  the  debt, 
default,  or  miscarriage  of  another  must  be  in  writing  and  signed 
by  the  party  to  be  charged.  Hence  a  guaranty  of  another's 
debt  or  promise  must  comply  with  this  provision. 

If  the  contract  is  strictly  one  of  indemnity,  namely,  a  promise 
to  save  another  harmless  from  the  results  of  some  transaction 
into  which  the  promisor  induces  him  to  enter,  it  is  to  be  distin- 
guished from  a  guaranty  and  need  not  be  in  writing.  In  such 
a  case  there  are  but  the  two  parties. 

Examples :  1.  B  promises  C,  an  officer,  that  if  the  latter  will  attach  D's 
goods  he  will  guaranty  him  against  loss  or  damage.  This  is  an  indemnity 
and  not  a  guaranty,  and  need  not  be  in  writing.  There  are  really  but  two 
parties  here. 

2.  Sometimes  it  is  very  difficult  to  say  whether  a  contract  is  one  of 
guaranty  or  indemnity.  B  promises  C  that  if  the  latter  will  go  upon  D's 
bail  bond  he  (B)  will  make  good  any  loss  C  may  suffer.  In  England  and 
in  many  American  states  this  is  treated  as  a  contract  of  indemnity,  while  in 
other  states  it  is  treated  as  a  contract  of  guaranty. 

3.  Again,  the  promise  may  be  an  original  instead  of  a  collateral  one,  in 
which  case  it  is  not  a  guaranty  and  need  not  be  in  writing.  "  If  you  will  let 
B  have  these  goods,  I  will  pay  for  them."  The  promisor  is  primarily  and 
not  collaterally  liable.  Had  he  said,  "  I  will  pay  for  them  if  B  does  not," 
it  would  have  been  a  guaranty. 

4.  Again,  the  promise  may  be  to  pay  the  debt  out  of  funds  put  into  the 
hands  of  the  promisor  for  that  purpose.  D  has  moneys  of  C  put  into  his 
hands  to  pay  for  goods  sold  to  C  by  B.  D  promises  B  to  pay.  This  is  not 
within  the  Statute  of  Frauds.    It  is  really  a  case  of  a  trust. 

In  all  doubtful  cases  it  is  safer  to  have  the  promise  put  into 
writing  and  signed.  In  some  states  it  is  necessary,  also,  that 
the  writing  should  express  the  consideration  upon  which  the 
guarantor's  promise  is  based. 


§§88,89,90]  NOTICE  OF  DEFAULT  1 59 

88.  Consideration.  When  the  contract  of  guaranty  is  made  at 
the  same  time  as  the  contract  which  it  guaranties,  the  consider- 
ation which  supports  the  principal's  promise  will  also  support 
the  guarantor's. 

When  the  contract  of  guaranty  is  made  subsequent  to  the 
main  contract,  a  new  consideration  is  required  to  support  it. 

Examples :  1.  "If  you  let  B  have  these  goods,  I  will  guaranty  payment 
for  them.    C."    The  delivery  of  the  goods  supports  B's  promise  and  also  C's. 

2.  B  owes  A  for  goods  already  sold  and  delivered.  C  writes  A,  "  I  will 
guaranty  B's  debt  to  you."  There  must  be  some  new  consideration  for  this 
or  the  promise  will  be  unenforceable.  Such  a  consideration  might  be  that 
A  should  bind  himself  to  give  B  an  extended  time  in  which  to  pay. 

89.  Notice  of  acceptance  by  guarantee.  Whether  the  creditor 
(guarantee)  must  notify  the  guarantor  that  he  accepts  the  guar- 
anty has  been  a  very  much  discussed  question.  It  is  not  neces- 
sary, of  course,  in  the  case  of  a  contemporaneous  guaranty, 
that  is,  a  guaranty  made  at  the  same  time  as  the  main  contract. 
The  difficulty  arises  in  a  case  of  a  guaranty  as  to  future 
advances. 

Example.  C  writes  A,  "  I  will  guaranty  payment  of  all  goods  you  may 
let  B  have  during  the  next  year."  Must  A  notify  C  that  he  accepts  the 
guaranty,  or  will  the  delivery  of  goods  to  B  constitute  an  acceptance  ? 
Generally  in  tin's  country  it  is  held  that  notice  must  be  given  in  such  a  case, 
because  the  guarantor  is  entitled  to  know  that  his  offer  of  guaranty  has 
been  accepted.  In  England  and  in  some  of  our  states  no  notice  is  necessary, 
the  acceptance  consisting  in  the  doing  of  the  act  specified,  that  is,  letting  B 
have  the  goods.  In  view  of  this  conflict  it  would  always  be  safer  to  notify 
the  guarantor  that  the  guaranty  has  been  accepted. 

90.  Notice  to  guarantor  of  the  default  of  the  principal.  Whether 
the  guarantee  must  notify  the  guarantor  that  the  principal  has 
defaulted  in  the  payment  or  other  obligation  covered  by  the 
guaranty  is  also  a  disputed  question.  Some  states  require  no 
notice,  while  others  require  notice,  but  do  not  agree  as  to  the 
cases  in  which  it  must  be  given. 

In  states  requiring  notice  these  different  holdings  are  found  : 
1.  That  the  guarantor  is  always  discharged  for  want  of  such 
notice  if  he  is  damaged  thereby. 


160  GUARANTY  [Ch.  VIII 

2.  (a)  That  the  guarantor  is  discharged  for  want  of  such 
notice  if  the  amount  for  which  he  is  bound  is  an  indefinite  one  ; 
but  (b)  that  he  is  not  discharged  for  want  of  notice  if  the 
amount   for  which  he  is  bound  is  definite. 

In  view  of  this  conflict  and  the  nicety  of  the  distinctions  it 
is  safer  for  the  creditor  to  notify  the  guarantor,  upon  default 
of  the  debtor,  of  the  fact  of  such  default  and  that  the  creditor 
looks  to  the  guarantor  for  payment. 

There  is  also  much  conflict  as  to  when  the  guarantee  is 
bound  to  disclose  to  the  guarantor  at  the  time  of  making  the 
guaranty  some  fact  known  to  the  guarantee  concerning  the 
honesty,  fidelity,  or  solvency  of  the  principal.  In  some  cases  a 
guarantor  has  been  relieved  of  liability  because  the  guarantee 
concealed  such  knowledge,  but  the  cases  are  by  no  means  clear 
as  to  what  constitutes  fraudulent  concealment. 

Examples :  I.  X  has  been  state  treasurer,  and,  known  to  the  state 
officers  who  are  required  to  take  and  approve  his  bond,  he  has  been  guilty 
of  defalcation.  They  take  a  bond  from  B  and  others  as  sureties  for  the 
fidelity  of  the  treasurer,  concealing  this  knowledge.  This  is  fraudulent  con- 
cealment and  B  and  the  other  sureties  are  not  liable.  The  same  result 
would  be  reached  if  an  employer,  knowing  of  the  dishonesty  of  his  clerk, 
afterwards  took  a  fidelity  bond  to  assure  his  honesty,  concealing  the  prior 
dishonesty. 

2.  X  is  known  to  C  to  be  financially  weak  or  insolvent.  C  takes  an  obliga- 
tion from  X  with  B  as  guarantor,  concealing  this  fact.  B  is  not  relieved. 
This  is  not  fraudulent  concealment.  So  it  has  also  been  held  not  to  be 
fraudulent  to  conceal  that  the  principal  has  been  gambling,  or  is  already 
indebted  to  the  guarantee.  If,  however,  the  guarantor  asks  the  guarantee 
about  such  matters,  he  must  answer  fully  and  fairly  if  he  answers  at  all. 

91.  What  will  discharge  the  guarantor.  A  guarantor  may  be 
discharged  from  his  liability,  and  it  remains  to  consider  what 
will  operate  to  work  such  a  discharge. 

I.  Discharge  of  the  principal.  If  the  principal  is  voluntarily 
discharged  or  released,  the  guarantor  is  also  discharged,  unless 
he  consents  to  such  release.  But  he  is  not  discharged  by  an 
involuntary  release,  as  a  release  in  bankruptcy  by  force  of  law. 

A  covenant  by  the  creditor  not  to  sue  the  debtor,  coupled 
with  a  reservation  of  the  rights  against  the  guarantor,  is  held 


§9']  DISCHARGE  OF  GUARANTOR  l6l 

in  England  and  in  some  of  our  states  not  to  discharge  the 
guarantor ;  and  an  agreement  for  release  with  such  reservation 
is  construed  to  be  a  covenant  not  to  sue.  But  this  exception  is 
not  recognized  in  some  of  our  states. 

Examples :  i.  B  guaranties  X's  debt  to  C,  who  discharges  X  from  lia- 
bility, giving  him  a  release  under  seal.     B  is  also  discharged. 

2.  In  above  (Example  i)  X  becomes  embarrassed  and  creditors  agree 
to  take  60  cents  on  the  dollar  and  release  X.  C  receives  his  60  per  cent. 
X  is  released.    So  is  B. 

3.  In  above  (Example  1)  X  goes  into  bankruptcy  and  is  discharged  by 
payment  of  60  per  cent.  X  is  released  but  B  is  not.  C  may  recover  the 
additional  40  per  cent  from  B. 

2.  Alteration  of  contract.  If  the  creditor  has  altered  the 
terms  of  the  contract  with  the  debtor  without  the  consent  of 
the  guarantor,  the  latter  is  discharged. 

Examples :  4.  C  guaranties  payment  for  a  specified  engine  to  be  sold 
by  B  to  A.  Afterwards  A  decides  to  take  a  different  engine  at  a  different 
price.    C  is  discharged. 

5.  C  guaranties  payment  of  a  note  from  B  to  A,  due  on  September  11. 
B  and  A  by  mutual  assent  change  the  note  to  read  October  11.  C  is  dis- 
charged. His  contract  is  destroyed  by  an  alteration  made  without  his  con- 
sent.   It  would  be  the  same  if  the  date  were  changed  to  August  1 1. 

3.  Extension  of  time  to  debtor.  If  the  creditor  definitely 
extends  the  time  of  payment  to  the  debtor  without  the  consent 
of  the  guarantor,  the  latter  is  discharged. 

Example  6.  C  has  guarantied  to  B  the  payment  of  a  debt  due  from 
A  on  April  1.  B  in  consideration  that  A  will  give  him  a  note  extends  the 
time  to  June  1.    C  is  discharged. 

7  (Exception').  There  is  an  exception  to  this  rule  in  the  case  where  the 
creditor  while  extending  the  time  to  the  debtor  expressly  reserves  his 
right  against  the  guarantor.  This  is  because  the  rights  of  the  guarantor 
against  his  principal  are  not  impaired,  since  the  latter  impliedly  agrees  that 
the  guarantor  may  at  once  pay  the  debt  to  the  creditor  and  proceed  against 
the  principal  for  indemnity. 

A  mere  forbearance  to  sue,  or  an  unenforceable  promise  to  forbear,  is 
not  an  extension  of  time  to  the  debtor. 

4.  Surrender  of  securities  by  creditor.  If  the  creditor  surrenders 
to  the  debtor  securities  held  for  the  enforcement  of  the  debt,  the 
guarantor  is  discharged  to  the  extent  he  may  be  injured  thereby. 


162  GUARANTY  [Ch.  vill 

5.  Failure  of  creditor  to  proceed  agamst  debtor  after  notice.  In 
New  York  and  some  other  states,  if  the  guarantor  directs  the 
creditor  to  proceed  against  the  debtor  and  the  creditor  fails 
to  do  so,  the  guarantor  is  discharged  if  the  debtor  afterwards 
becomes  insolvent.  This  is  also  a  statutory  rule  in  some  states  ; 
but  generally  it  is  not  in  force,  and  it  does  not  apply,  even  in 
New  York,  to  an  indorser  of  a  negotiable  instrument. 

6.  Revocation  by  guarantor.  If  the  consideration  for  a  guar- 
anty consists  of  an  act  to  be  done  in  the  future  by  the  guaran- 
tee, a  notice  of  revocation  before  the  act  is  done  will  be  effectual 
and  will  relieve  the  guarantor.  If  the  consideration  consists  of  a 
series  of  acts  to  be  done  by  the  guarantee,  notice  of  revocation 
will  be  effectual  as  to  those  not  yet  done,  but  will  be  ineffectual 
as  to  those  already  done. 

Example  8.  B  writes  to  X,  "If  you  let  C  have  goods  for  his  store 
during  the  coming  year,  I  will  guarantee  payment."  On  January  10  X  lets 
C  have  goods  to  the  value  of  $150,  and  on  February  5  to  the  value  of  $175. 
On  March  1  B  notifies  X  that  he  will  be  no  longer  liable  for  goods  sold  C. 
On  March  15  X  lets  C  have  $250  worth  of  goods.  B  is  liable  as  guarantor 
for  $325,  but  not  for  the  $250. 

7.  Death  of  guarantor.  The  death  of  the  guarantor  has  the 
same  effect  as  an  express  revocation,  though  some  states  require 
that  the  guarantee  should  have  actual  notice  of  the  death  in 
order  that  it  should  operate  as  a  revocation. 

Example  9.  In  Example  8,  suppose  B  died  on  March  1.  In  many  states 
this  would  operate  to  revoke  the  guaranty  as  to  any  advances  made  there- 
after. In  other  states  it  would  operate  only  from  the  time  X  had  notice 
of  it.  In  any  event  B's  estate  would  be  liable  for  the  advances  made  before 
his  death. 

Surety.  In  the  case  of  a  surety,  as  distinguished  from  a  guarantor, 
some  special  results  of  revocation  or  death  must  be  noted.  (1)  It  is  a 
technical  rule  of  the  law  (when  not  modified  by  statute)  that  where  an 
obligation  is  joint  the  death  of  one  joint  obligor  extinguishes  the  liability 
as  to  him,  and  the  survivor  alone  is  liable.  If  A  as  principal  and  B  as 
surety  jointly  promise  to  pay  C,  the  death  of  B  relieves  his  estate.  But  if 
the  promise  is  joint  and  several  ("  We,  A  as  principal  and  B  as  surety, 
jointly  and  severally  promise  to  pay  C  $100  "),  the  death  of  one  party  does 
not  relieve  his  estate.  This  technical  rule  has  now  been  very  generally 
changed  by  statute  so  that  the  death  of  a  joint  obligor  does  not  extinguish 


§92]  LIABILITY  OF  GUARANTOR  163 

the  claim  as  to  his  estate.  Under  the  above  rule  the  death  of  a  joint  surety 
would  of  course  revoke  liability  as  to  future  advances.  (2)  If  the  surety- 
ship is  joint  and  several,  the  death  of  the  surety  does  not  revoke  the 
suretyship,  as  does  the  death  of  a  guarantor.  A  guaranty  is  collateral,  but  a 
suretyship  is  a  part  of  the  original  contract  itself  and  stands  or  falls  with  it. 
(3)  (a)  In  the  case  of  an  indemnity  bond  for  an  indefinite  period  the  surety 
may  at  any  time  give  notice  of  revocation,  leaving  the  employer  whose 
employee's  fidelity  was  assured  a  reasonable  time  to  get  other  sureties. 
(t>)  But  in  the  case  of  indemnity  bonds  for  a  definite  period  the  surety  can- 
not withdraw  unless  the  employee  or  officer  has  defaulted  so  that  he  may  be 
removed,  or  unless  the  surety  has  reserved  in  the  bond  the  right  to  with- 
draw upon  due  notice,  (c)  The  death  of  a  surety  on  a  joint  and  several 
bond  does  not  terminate  the  liability  of  his  estate  even  as  to  a  breach  by 
the  principal  occurring  after  the  death  of  the  surety. 

An  indemnity  is  in  some  respects  like  a  suretyship  and  in  some  like  a 
guaranty. 

8.  Retention  of  principal  after  knozvlcdge  of  his  disJionesty.  If 
the  guaranty  be  against  the  dishonesty  or  defalcation  of  the 
principal,  the  guarantor  will  be  discharged  if  the  guarantee, 
after  knowledge  of  the  principal's  dishonesty,  continues  him  in 
his  service. 

9.  Main  contract  noncnforceable  against  principal.  If  the 
main  contract  is  illegal,  and  so  not  enforceable  against  the 
principal,  the  collateral  contract  of  guaranty  is  also  nonenforce- 
able.  This  rule  has  been  applied  to  usurious  contracts.  So 
also,  if  the  main  contract  was  procured  from  the  principal  by- 
fraud  and  cannot  for  that  reason  be  enforced,  the  guaranty  of 
it  is  also  unenforceable.  The  same  has  been  held  of  contracts 
procured  by  duress,  but  some  cases  have  escaped  this  rule 
where  the  guarantor  signed  with  knowledge  of  the  duress. 
Failure  of  consideration  which  renders  the  main  contract  non- 
enforceable  also  relieves  the  guarantor. 

But  the  fact  that  the  principal  is  an  infant,  or  of  unsound 
mind,  or  a  married  woman,  and  so  may  escape  liability,  will  not 
release  the  guarantor.  These  are  defenses  personal  to  the  prin- 
cipal and  the  guarantor  cannot  avail  himself  of  them. 

92.  Guarantor's  liability.  The  guarantor's  liability  is  fixed 
by  the  terms  of  the  contract.  This  may  stipulate  for  a  definite 
sum  or  for  such  sum  as  the  debtor  is  liable  for.    The  guarantor 


• 


!64  GUARANTY  [Ch.  VIII 

may  be  compelled  to  pay  without  resorting  to  the  principal 
debtor,  unless,  indeed,  he  has  merely  guarantied  the  collection 
of  a  debt,  in  which  case  the  creditor  must  first  exhaust  his 
remedies  against  the  debtor. 

Examples  :  i .  "I  hereby  guaranty  the  within  note.  C."  The  holder  of 
the  note  may  proceed  against  C  without  first  proceeding  against  the  maker 
of  the  note. 

2.  "  I  hereby  guaranty  the  collection  of  the  within  note.  C."  The 
holder  must  first  exhaust  his  remedies  against  the  maker  before  proceeding 
against  C. 

93.  Guarantor's  remedies.  A  guarantor  who  has  paid  his 
principal's  debt  or  obligation  is  entitled  to  the  following 
remedies. 

i.  Indemnity  against  principal.  The  guarantor  may  recover 
from  his  principal  all  money  properly  paid  on  account  of  the 
guaranty,  together  with  any  costs  reasonably  incurred  in  defend- 
ing the  creditor's  claim.  In  order  to  safeguard  himself  the 
guarantor  should  give  the  principal  notice  of  an  intended  pay- 
ment in  order  that  the  principal  may  interpose  to  the  creditor's 
claim  any  defense  he  thinks  fit. 

2.  Subrogation  to  rights  of  creditor.  The  guarantor  is  entitled 
to  be  subrogated  to  all  collateral  securities  held  by  the  creditor 
for  the  payment  of  the  debt. 

Example  i .  B  borrows  money  of  A  and  gives  as  security  certain  bonds 
in  pledge  and  also  the  guaranty  of  C.  C  pays  the  debt  to  A.  C  is  entitled 
to  the  bonds  in  pledge  as  security  for  his  claim  against  B. 

3.  Contribution  from  co-guarantors.  If  two  or  more  persons 
are  joint  guarantors  for  the  principal,  and  one  of  them  pays 
the  entire  debt,  he  is  entitled  to  a  pro  rata  contribution  from 
his  co-guarantors.  If  one  be  insolvent,  or  out  of  the  jurisdic- 
tion, the  others  may  be  compelled  to  contribute  ratably. 

Example  2.  C,  D,  and  E  are  co-guarantors  for  a  debt  of  $1200  owed  to 
B  by  A.  C  pays  the  entire  debt.  He  is  entitled  to  recover  at  law  #400 
each  from  D  and  E.  If  E  be  insolvent  and  unable  to  pay,  then  C  may 
recover  in  equity  $600  from  U. 


§93]  FORMS  OF  GUARANTY  165 


Forms  of  Guaranty 

A    general    guaranty,    or    "letter    of    guaranty,"    of   future 
advances  may  be  as  follows  : 

I  hereby  guaranty  to  any  person  advancing  money  (or  selling  goods,  or 

whatever  the  act  may  be)  to  [Principal]  not  exceeding dollars,  the 

payment  therefor  at  the  expiration  of  the  credit  which  shall  be  given. 

(Date) (Signature)  [Guarantor's  Name] 

(Address) 


A  special  guaranty  of  future  advances  may  be  as  follows  : 

To  [Guarantee  or  Creditor] 

I  will  be  responsible  for  goods  (specify  a  particular  kind  if  desired)  sold 
by  you  to  [Principal]  to  an  amount  not  exceeding  in  value  an  aggregate 
of dollars. 

(Date) (Signature)  [Guarantor's  Name] 

(Address) 


A  guaranty  of  contemporaneous  credit  may  be  as  follows, 
and  would  usually  be  attached  to  another  contract : 

In  consideration  of  the  agreement  of  [Principal]  above  set  forth,  I 
hereby  guaranty  to  the  said  [Creditor]  that  the  above-named  [Principal] 
will  well  and  faithfully  perform  everything  by  the  foregoing  agreement  on 
his  part  to  be  performed  at  the  times  and  in  the  manner  above  provided. 

(Date) Signature  [Guarantor] 

A  guaranty  of  a  past  credit  should  state  a  new  consideration. 

In  consideration  of  one  dollar  to  me  in  hand  paid,  the  receipt  whereof 
is  hereby  acknowledged,  I  hereby  guaranty,  etc. ;  or, 

In  consideration  of  the  extension  of  time  iiiven  by  [Creditor-Guarantee] 
to  [Debtor-Principal]  upon  the  above  agreement,  I  hereby  guaranty,  etc. ; 
or, 

In  consideration  of  the  discontinuance  of  proceedings  by  [Creditor-Guar- 
antee] instituted  by  him  against  [Debtor-Principal]  I  hereby  guaranty,  etc. 


!66  GUARANTY  [Ch.viiI] 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  86.  Define  guaranty;  guarantor;  guarantee  ;  principal.  Distin- 
guish a  surety  from  a  guarantor  ;  an  indorser  from  a  guarantor  ;  guaranty  of 
payment  from  guaranty  of  collection.    What  is  a  continuing  guaranty? 

87.  How  must  a  guaranty  be  evidenced  ?  Does  this  extend  to  an  indem- 
nity contract?    Distinguish  an  indemnity  contract. 

Problem  I.  X  buys  goods  of  C.  B  says,  "  If  you  let  X  have  the  goods, 
I  will  pay  you  if  he  does  not."    X  does  not  pay.    C  sues  B.    Result  ? 

88.  Does  a  guaranty  require  a  consideration  ?  What  constitutes  the  con- 
sideration in  a  contemporaneous  guaranty?  in  a  subsequent  guaranty? 

Problem  2.  X  buys  goods  of  C,  payable  in  thirty  days.  At  the  end  of 
the  thirty  days  B  writes  C,  "  If  you  will  give  X  thirty  days  more,  I  will  be 
answerable  for  his  paying  the  claim."  C  takes  X's  note  for  thirty  days 
more.    It  is  not  paid.    C  sues  B.    Result? 

Problem  j.  In  above  case  C  does  not  take  a  note,  but  simply  refrains 
from  suing  X  for  thirty  days.    Result? 

89.  Is  it  necessary  to  communicate  to  the  guarantor  an  acceptance  of 
the  guaranty  ?    When  ? 

90.  Is  it  necessary  to  give  the  guarantor  notice  of  the  default  of  the 
principal?  If  so,  under  what  circumstances?  Is  the  guarantee  bound  to 
inform  the  guarantor  of  facts  known  to  him  affecting  the  risk  ?    Illustrate. 

91.  What  will  discharge  a  guarantor?  Will  bankruptcy  of  principal? 
Will  covenant  not  to  sue  principal  ?  Will  release  of  principal  reserving  rights 
against  guarantor?  Illustrate  alteration  of  contract.  What  is  an  extension 
of  time  to  the  debtor?  Effect  of  surrendering  securities  by  creditor?  Is 
creditor  bound  to  proceed  against  debtor  if  requested  by  guarantor?  When 
may  a  guaranty  be  revoked  ?  What  is  the  effect  of  the  death  of  a  guarantor  ? 
of  a  surety?  Difference  between  joint  promises  and  joint  and  several  prom- 
ises? What  are  the  rights  of  a  surety  on  an  indemnity  bond?  When  will 
inability  to  enforce  the  main  contract  discharge  the  guarantor  and  when  not  ? 

Problein  4.  B  guaranties  X's  debt  to  C.  Afterwards  C  gives  X  a  release, 
and  then  sues  B  on  the  guaranty.    Result  ? 

Problem  5.    In  above  case  C  releases  B  and  then  sues  X.    Result? 

Problem  6.  B  guaranties  X's  debt  to  C.  Afterwards  C  gives  X  "  a 
release  in  full  of  said  claim,  reserving,  however,  all  rights  in  respect  thereto 
against  B."    C  sues  B  on  the  guaranty.    Result  ? 

Problem  7.  B  guaranties  X's  debt  to  C.  Afterwards  C  gives  X  a  valid 
and  enforceable  extension  of  time.  When  this  time  expires  X  does  not 
pay  and  C  sues  B.    Result? 


REVIEW  QUESTIONS  AND  PROBLEMS  167 

92.  May  the  guarantee  proceed  against  the  guarantor  without  first  pro- 
ceeding against  the  principal?    Illustrate. 

Problem  8.  X  gives  C  a  promissory  note.  B  writes  and  signs  on  the 
back  of  the  note,  "  I  hereby  guaranty  the  collection  of  the  within  note." 
X  does  not  pay  the  note.    C  sues  B.    Result  ? 

93.  What  are  the  guarantor's  remedies  against  the  principal?  What  is 
his  right  of  subrogation?  of  contribution  ? 

Problem  g.  X  gives  C  a  promissory  note  secured  by  a  mortgage  on  X's 
property.  B  guaranties  the  payment.  After  maturity  C  sues  and  recovers 
from  B.    What  are  B's  rights  against  X? 

Problem  10.  X  owes  C,  and  B,  D,  and  E  guaranty  the  debt.  C  recovers 
from  B.     What  are  B's  rights? 


CHAPTER  IX 

NEGOTIABLE  INSTRUMENTS 

I.  Nature  and  Characteristics 

94.  Kinds  of  negotiable  instruments.  Negotiable  instruments 
are  written  contract  obligations  which  can  be  transferred  from 
hand  to  hand  like  money.  They  are  instruments  of  trade  or  of 
credit,  that  is,  they  are  a  substitute  for  money  or  an  evidence 
of  a  postponed  debt.  They  may  be  issued  by  private  persons, 
or  by  banks,  or  by  the  government. 

Examples :  i.  If  B  buys  a  bill  of  goods  of  C,  he  may  (a)  pay  money, 
which  may  be  either  coin,  promises  of  the  government  to  pay,  or  promises 
of  a  national  bank  to  pay  ;  (b)  give  a  check  on  his  bank ;  (c)  give  his  prom- 
issory note;  (d)  accept  a  bill  of  exchange  drawn  on  him  by  the  seller; 
(<?)  transfer  D's  check,  promissory  note,  or  bill  of  exchange  drawn  or  payable 
to  his  (B's)  order  or  to  bearer ;  (/)  draw  and  deliver  a  bill  of  exchange  on 
E  (who  owes  B)  payable  to  C's  order.  In  any  case,  as  above,  B  has  given 
C  a  negotiable  instrument,  except  where  he  pays  coin.  But  even  coined 
money  is  in  fact  a  negotiable  chattel,  for  whatever  title  or  want  of  title  there 
may  have  been  in  B  the  taker  of  it  for  value  gets  a  good  title. 

2.  If  any  instrument  given  above  is  payable  on  demand,  it  is  essentially 
an  instrument  of  trade  taking  the  place  of  money.  But  if  it  is  payable 
at  some  future  day  it  becomes  essentially  an  instrument  of  credit,  because 
B  secures  a  postponement  of  the  payment  of  his  debt,  that  is,  secures  a 
term  of  credit  from  C.  But  even  an  instrument  payable  on  demand  is  also 
one  of  credit,  because  until  actually  presented  for  payment  it  is  taken  on 
the  credit  of  the  one  issuing  it. 

The  principal  kinds  of  negotiable  instruments  are  as  follows  : 
(a)  Bills  of  exchange,  foreign  and  inland.    These  are  orders 
by  one  person  to  another  to  pay  money  to  a  third  person   or 
some  one  named  by  him,  or  to  bearer  (sec.  96). 

(&)  Promissory  notes,  including  notes  and  certificates  of  de- 
posits by  banks.  These  are  promises  by  one  person  to  pay  money 
to  another  or  some  one  named  by  him,  or  to  bearer  (sec.  96). 

168 


[§94]  NATURE  AND  CHARACTERISTICS  169 

(c)  Checks,  or  orders  by  depositors  on  their  banks  to  pay 
money  to  a  third  person  or  some  one  named  by  him,  or  to 
bearer  (sec.  96). 

(d)  Bonds,  or  promises  in  a  special  form  by  corporations, 
cities,  or  governments  to  pay  money  to  a  person,  or  to  a  person 
named  by  him,  or  to  bearer  (sec.  96). 

The  instrument  first  used  was  the  foreign  bill  of  exchange 
by  which  merchants  in  one  country  were  enabled  to  pay  debts 
in  another  country  without  the  risk  of  sending  money  across 
seas.  The  Florentines  or  the  Venetians  introduced  these  instru- 
ments into  England  as  early  as  the  thirteenth  century.  The 
inland  bill  was  later  introduced  to  serve  the  same  purpose 
between  different  parts  of  the  same  country.  In  this  country 
an  inland  bill  is  one  drawn  and  payable  within  the  same  state. 
A  bill  drawn  in  New  York  and  payable  in  Chicago  would  be 
by  our  law  a  foreign  bill. 

Example  3.  B  in  New  York  wishes  to  pay  a  debt  to  C  in  London. 
(a)  If  B  has  a  debtor,  D,  in  London,  he  may  draw  a  bill  of  exchange  on  D 
payable  to  C  or  order  and  send  it  to  C,  who  can  present  it  to  D  and  obtain 
payment,  (d)  B  may  buy  in  New  York  a  bill  of  exchange  drawn  by  F 
in  New  York  on  his  debtor,  E,  in  London,  payable  say  to  G's  order. 
G  sells  and  indorses  it  to  B,  and  B  indorses  it  to  C  and  sends  it  to  C,  who 
presents  it  to  E  and  obtains  payment,  (c)  B  may  buy  at  a  New  York  bank 
a  bill  of  exchange  drawn  by  that  bank  on  a  London  bank,  payable  to  C  or 
his  order ;  B  sends  it  to  C,  who  presents  it  at  the  London  bank  and  receives 
payment.  By  these  methods  payments  are  made  between  New  York  and 
London,  or  vice  versa,  without  transferring  money.  In  the  end  some  big 
banking  concern  in  one  place  may  export  gold  to  the  other  place  to  settle 
balances. 

A  check  is  a  special  kind  of  bill  of  exchange,  being  a  bill 
drawn  by  a  depositor  on  his  bank,  payable  on  demand.  A  bill 
of  exchange  drawn  by  one  bank  on  another  is  often  called 
a  draft.  It  is  simply  a  check  and  is  more  properly  called  a 
cashier's  check. 

Promissory  notes  were  once  held  by  the  English  courts  not 
to  be  negotiable  instruments,  but  Parliament  in  1704  passed 
an  act  providing  that  they  should  be  negotiable  the  same  as 
bills  of  exchange,  and  such  is  the  law  in  this  country.    When 


I  jo  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

these  are  issued  by  banks  we  call  them  bank  notes.  A  certifi- 
cate of  deposit  is  another  form  of  promissory  note  issued  by  a 
bank  to  one  who  deposits  money  and  takes  the  note  of  the  bank 
for  it.  Corporations  and  governments  issue  long-time  promises 
to  pay  in  the  form  of  bonds,  which  in  the  case  of  private  corpo- 
rations are  usually  secured  by  a  mortgage  on  the  corporate 
property. 

Bills  of  lading  at  common  law,  and  warehouse  receipts  by  statute,  are 
given  a  quasi-negotiable  character,  but  these  do  not  fall  within  the  gener- 
ally accepted  category  of  negotiable  instruments.  Stock  certificates  have 
also  a  quasi-negotiable  standing.  The  first  two  are  promises  to  deliver 
goods  and  the  last  is  an  evidence  of  an  interest  in  a  business  enterprise, 
while  negotiable  instruments  have  to  do  with  unconditional  promises  or 
orders  to  pay  money.  The  above  instruments  resemble  negotiable  instru- 
ments mainly  in  the  fact  that  they  are  transferred  from  hand  to  hand  by 
indorsement,  but  they  are  not,  like  negotiable  instruments,  a  kind  of  sub- 
stitute for  money.    They  are  paper  evidences  of  some  property  right. 

95.  Characteristics  of  negotiable  instruments.  There  are  three 
characteristics  that  serve  to  distinguish  negotiable  instruments 
from  ordinary  contracts. 

i .  Presumptive  consideration.  If  a  contract  is  in  the  form  of 
a  negotiable  instrument,  it  has  a  presumption  of  consideration, 
whereas  in  an  ordinary  contract  one  who  brings  an  action  upon 
it  must  prove  that  the  promise  he  is  seeking  to  enforce  rests 
upon  a  consideration. 

Example  i.  (a)  "On  April  I  next,  I  promise  to  pay  to  the  order  of 
A.B.  one  hundred  dollars.  CD."  (b)  "On  April  i  next,  I  promise  to 
deliver  to  the  order  of  A.B.  one  hundred  bushels  of  wheat.  CD."  In  the 
first  example,  A.  B.  in  an  action  against  C.  D.  need  not  prove  any  considera- 
tion ;  it  is  for  CD.  to  prove  that  there  was  none,  if  he  can  do  so.  In  the 
second  example,  A.  B.  in  an  action  against  C.  D.  must  prove  the  consideration 
for  the  promise  to  deliver  the  wheat,  and  if  he  fails  to  do  so  he  will  be 
defeated  in  his  action. 

2.  Days  of  grace.  Unless  abolished  by  statute,  three  days  of 
grace  beyond  the  time  fixed  are  allowed  for  the  payment  of 
negotiable  instruments,  whereas  in  ordinary  contracts  no  days 
of  grace  are  allowed.  In  the  examples  given  above,  A.B.  could 
not  demand   payment  of   the  money  until  April  4,  while  he 


§95]  NATURE  AND  CHARACTERISTICS  171 

could  demand  delivery  of  the  wheat  on  April  1.  Days  of  grace 
have  been  very  generally  abolished  by  statute.  They  were 
established  when  means  of  communication  between  distant 
places  were  uncertain  and  slow ;  with  the  introduction  of  steam 
the  need  for  them  has  disappeared.1 

3.  Negotiability.  Negotiability  is  the  important  characteristic 
of  these  instruments.  As  we  have  seen  (sec.  35),  ordinary  con- 
tracts are  often  assignable,  but  the  assignee  cannot  sue  in  his 
own  name  except  by  force  of  statute,  and  when  he  sues  he  is 
subject  to  all  the  defenses  that  might  have  been  set  up  against 
his  assignor.  Bills,  notes  and  checks,  however,  are  negotiable, 
not  merely  assignable.  Negotiability  carries  with  it  the  following 
results:  (a)  the  transferee  gets  a  legal  title  and  can  sue  in  his 
own  name  ;  (b)  if  the  transferee  is  a  holder  for  value  and  without 
notice,  he  is  free  from  the  defenses  that  might  have  been  set  up 
against  his  transferror,  except  those  that  operate  to  destroy  the 
contract  altogether.  He  is  not  subject  to  the  personal  defenses 
of  fraud,  duress,  want  of  consideration,  want  of  title  in  the 
transferror,  and  the  like,  but  is  subject  to  the  absolute  defenses 
of  forgery,  alteration,  infancy  of  maker,  that  the  statute  declares 
the  instrument  void  (as  it  does  a  gambling  contract),  etc.  It  is 
this  element  of  negotiability  that  makes  it  necessary  to  treat 
these  contracts  separately. 

Example  2.  (a)  In  Example  1,  given  above,  assume  that  A.B.  indorses 
and  delivers  the  note  to  E.  F.  on  March  15,  and  that  E.F.  sues  the  maker 
CD.  If  E.F.  paid  value  and  had  no  notice  of  any  defect  in  A.B.'s  title, 
C.  D.  cannot  defend  on  the  ground  that  A.  B.  procured  the  note  by  fraud  or 
without  consideration  ;  but  the  defense  that  C.  D.'s  name  is  forged,  or  that 
the  note  has  been  altered,  would  be  a  good  defense.  (/;)  In  Example  1, 
assume  that  A.  B.  indorses  and  delivers  to  E.  F.  the  promise  to  deliver  the 

1  In  the  following  states  or  territories  days  of  grace  are  still  allowed  upon  bills 
or  notes  payable  at  a  future  time:  Alabama,  Alaska,  Arkansas,  Indiana,  Kansas, 
Michigan,  Mississippi,  Missouri,  Nebraska,  Nevada,  New  Mexico,  South  Carolina, 
South  Dakota,  Texas,  Wyoming. 

In  many  of  these  states  bills  of  exchange  payable  at  sight  are  also  entitled  to 
days  of  grace.  In  some  states  in  which  days  of  grace  are  abolished  on  instruments 
payable  at  a  fixed  future  time  they  are  still  allowed  on  bills  of  exchange  or  drafts 
payable  at  sight,  as,  for  example,  in  Maine,  Massachusetts,  New  Hampshire,  and 
Rhode  Island. 


172 


NEGOTIABLE  INSTRUMENTS 


[Ch.  IX 


wheat,  and  that  E.  F.  pays  value  and  has  no  notice  of  any  defect.  If  E.  F. 
sues  C.  D.,  any  defense  that  would  be  good  against  A.  B.  is  still  good  against 
E.  F.    This  is  an  assignment,  and  an  assignee  stands  in  his  assignor's  shoes. 


96.  Definitions.  The  various  negotiable  instruments  are 
named  and  defined  as  follows. 

1.  Bill  of  exchange.  A  bill  of  exchange  is  an  unconditional 
order  in  writing  addressed  by  one  person  to  another,  signed  by 
the  person  giving  it  (called  the  drawer),  requiring  the  person  to 
whom  it  is  addressed  (called  the  drawee)  to  pay  on  demand  or 
at  a  fixed  or  determinable  future  time  a  sum  certain  in  money 
to  the  order  of  a  designated  person  (called  the  payee),  or  to 
bearer. 

The  person  upon  whom  the  bill  is  drawn,  that  is,  the  drawee, 
may  be  asked  to  signify  his  assent  to  honor  the  bill,  and  if  he 
does  so  he  becomes  an  acceptor.  This  assent  is  usually  signi- 
fied by  writing  his  name  with  the  word  "Accepted  "  across  the 
face  of  the  bill.  When  a  bank  so  signifies  its  assent  to  honor 
a  check  the  check  is  said  to  be  "  certified." 

If  not  payable  to  order  or  bearer,  the  bill  would  be  non- 
negotiable. 


Bill  of  Exchange  with  Acceptance 


tyex&ZZZ&zc&eJfrsffl?*  - 


^iSb     C%,*^>  »2&, 


The  above  bill  was  accepted  Nov.  23,  1904.  It  was  due  ninety  days  from 
sight,  and  hence  became  due  ninety  days  from  November  23,  or  on  Feb.  21, 
1905.  It  could  be  transferred  by  an  indorsement  on  the  back  by  Everett, 
Moore  &  Co.,  the  payees. 


§96] 


NATURE  AND  CHARACTERISTICS 


!73 


A  foreign  bill  of  exchange  is  often  drawn  in  a  set  of  two  or 
three  duplicate  parts,  each  part  numbered  and  referring  to  the 
others.  The  parts  are  used  to  avoid  the  chance  of  loss  in  the 
mails,  or  to  save  time  in  securing  an  acceptance. 


Bills  in  a  Set 


THE  BATTERY  PARK  NATIONAL  BANK 


Q 

0  co 
w  N 


THE  BATTERY  PARK  NATIONAL  BANK 


Qg 


£%L*M±t- 


If  there  were  three  parts,  the  first  would  read,  "second  and  third  of 
same  tenor  and  date,  unpaid,"  and  the  second  would  read,  "  first  and  third 
of  same  tenor  and  date,  unpaid,"  and  the  third  would  read,  "  first  and 
second  of  same  tenor  and  date,  unpaid." 

(a)  Suppose  Sherwood  &  Co.  buy  the  above  exchange  in  New  York 
in  order  to  pay  a  debt  to  James  &  Co.  in  Calcutta,  India.  Were  it  payable 
at  sight  or  at  a  fixed  future  time,  they  would  indorse  each  part  to  James  &  Co. 
and  send  one  part  by  one  steamer  and  another  by  a  second  steamer  in  order 
to  avoid  danger  of  loss  or  delay.    In  such  case  two  parts  would  be  enough. 


i74 


NEGOTIABLE  INSTRUMENTS 


[Ch.  IX 


(b)  As  it  is  payable  after  sight,  if  it  is  all  sent  to  Calcutta  and  from 
there  to  London  it  would  be  weeks  before  any  part  could  be  presented  for 
acceptance,  and  it  would  then  run  ninety  days  after  such  presentation.  But 
if  one  part  is  sent  direct  to  London  for  acceptance,  the  final  due  date  will 
be  hastened  and  the  present  worth  of  the  bill  increased.  Therefore  one  part 
is  sent  to  London  indorsed,  "  At  the  disposal  of  the  second  or  third,  duly 
indorsed."  The  second  and  third  will  then  be  indorsed  to  James  &  Co. 
and  sent  to  Calcutta  by  different  mails  with  the  information  that  the  first 
has  gone  direct  to  London  for  acceptance.  James  &  Co.  in  Calcutta  can  then 
deal  with  the  bill,  assuming  it  would  be  accepted  about  December  i  and 
would  become  due  ninety  days  thereafter.  They  will  send  parts  two  and 
three  to  London  in  time  to  have  them  there  when  the  bill  becomes  due,  or 
they  will  sell  them  in  Calcutta  and  the  buyer  will  send  them  to  London. 

The  drawee  should  accept  but  one  part,  for  if  he  accepts  two  each  might 
be  indorsed  to  different  holders  and  the  acceptor  would  be  liable  on  each. 
A  holder  should  not  indorse  parts  to  different  persons  or  he  will  be  twice  liable. 
When  the  bill  is  paid  the  acceptor  should  take  up  the  part  he  has  accepted. 

2.  Promissory  note.  A  promissory  note  is  an  unconditional 
promise  in  writing  made  by  one  person  (called  the  maker)  and 
signed  by  him,  engaging  to  pay  on  demand,  or  at  a  fixed  or 
determinable  future  time,  a  sum  certain  in  money  to  the  order 
of  another  person  (called  the  payee),  or  to  bearer. 

If  not  payable  to  order  or  bearer,  the  note  would  be  non- 
negotiable. 

Promissory  Note 


THE  BATTERY  PARK  NATIONAL  BANK  ° 


fo/XM' /<■-££-// t0?n ':>' ^f /'^ '/  & ' 


/ 


■JEW  YORK 


-»'fi*-,     , ...^   LJ   -    ..    .    .....     ...    ,.„,,^„.-,i„Wn^/_^.r.i-i.1.1.^^ 


It  is  not  necessary  to  state  the  place  where  the  note  is  payable,  but  this 
is  usually  done  in  commercial  paper  in  order  to  facilitate  presentment  for 
payment.  This  note  may  be  indorsed  on  the  back  by  Robert  H.  Moore  &  Co. 
The   words   "with    interest"   may   be   written    in   after   the   words   "value 


§96] 


NATURE  AND  CHARACTERISTICS 


l7S 


received,"  if  the  note  is  to  draw  interest.  The  above  note  may  be  discounted, 
say  at  the  bank  where  payable,  that  is,  the  payee  may  indorse  and  sell  it  to 
the  bank  for  its  present  worth.  How  much  is  £2500  payable  in  three 
months  worth  in  New  York  where  interest  is  six  per  cent? 

3.  Certificate  of  deposit.  A  certificate  of  deposit  is  in  effect  a 
promissory  note  given  by  a  bank  to  a  depositor,  acknowledging 
the  receipt  of  the  deposit  and  promising  to  pay  it  to  the  order 
of  the  depositor.  It  may  be  made  payable  on  demand,  or  it 
may  be  made  payable  at  a  fixed  future  time  with  interest.  If 
one  has  a  special  fund  which  he  wishes  to  put  into  a  bank  but 
against  which  he  does  not  wish  to  draw  checks,  he  ordinarily 
takes  a  certificate  of  deposit. 

Certificate  of  Deposit 


%  1X0^0  ^r*^-  no 

V  THE  BATTERY  PARK  NATIO  NAL  BANK 


Q 

o 

w 

g 


NOT   SUBJECT   TO   CHECK 


^&&fitoO?-a 


4.   Check.    A  check  is  a  bill  of  exchange  drawn  on  a  bank 
and  payable  on  demand.    If  payable  at  a  future  time,  it  would 


Check 


THE  BATTERY  PARK  NATIONAL  BANK 

2+  STATE   STRSej 


be  an  ordinary  bill  of  exchange.     When  one  deposits  money  in 
a    bank    he  receives   a    bank    book,   with  the   amount    he    has 


176 


NEGOTIABLE  INSTRUMENTS 


[Ch.  IX 


deposited  entered  in  it.  He  can  then  draw  checks  against  this 
deposit.  If  a  payee  wishes  to  be  sure  that  the  check  is  good, 
he  can  ask  the  drawer  to  have  it  certified.  When  certified,  the 
bank  becomes  liable  to  the  payee,  and  it  charges  the  certified 
check  against  the  depositor's  account  as  a  check  which  it  has 
actually  paid. 

Certified  Check 


THE  BATTERY  PARK  .NATIONAL  BANK. 


,VO 


The  words  "Accepted,"  "Certified,"  "Good"  are  all  used  to  signify- 
that  the  bank  has  honored  the  check. 

5.  Bank  draft  or  check.  A  bank's  check,  often  called  a  "  draft," 
is  a  check  drawn  by  one  bank  upon  another  bank  and  payable 
on  demand.     If  payable  at  a  future  time,  it  is  a  bill  of  exchange 


Bank  Draft  or  Check 


<^\  ^-  ^-^   r~~$\      - — 


■/Msr- 


Metropolitan  Trust  Co.' 


OF  THE  CITY  OF  N  EW  VOISK. 


St*.     %..     /y»7fcx- 


&JU,. 


but  not  a  check.  One  bank  often  keeps  deposits  in  another 
bank  in  order  to  be  able  to  furnish  these  bank  drafts  Or  bills. 
A  country  bank   will  need  to   be  able  to  furnish  New   York 


§96]  NATURE  AND  CHARACTERISTICS  1 77 

exchange,  and  even  a  New  York  bank,  if  not  a  member  of 
the  New  York  Clearing  House,  will  need  to  be  able  to  furnish 
drafts  or  checks  upon  a  New  York  bank  that  is  a  member  of 
the  clearing  house.  So  a  large  bank  may  keep  accounts  with  a 
London  bank  in  order  to  issue  its  checks  or  bills  on  London  and 
furnish  London  exchange. 

These  drafts  or  banker's  checks  are  usually  drawn  without  being  coun- 
tersigned by  the  president,  but  some  banks  require  this  out  of  extra 
caution. 

In  the  example  of  a  bill  in  sets  given  above  we  have  a  banker's  bill  of 
exchange.  It  is  drawn  by  a  New  York  bank  on  a  London  bank  and  is 
payable  ninety  days  after  sight,  that  is,  ninety  days  after  it  is  first  presented 
at  the  London  bank.  This  is  called  "London  exchange";  it  is  a  bill  of 
exchange  drawn  on  a  bank  in  London. 

6.  Bonds.  A  negotiable  bond  is  in  effect  a  promissory  note 
under  seal  issued  by  a  corporation,  government,  or  governmen- 
tal political  division  like  a  city  or  county.  At  common  law 
a  negotiable  instrument  could  not  be  under  seal;  if  an  instru- 
ment otherwise  negotiable  was  duly  sealed,  it  thereby  ceased 
to  be  negotiable.  But  by  custom  recognized  by  courts  these 
instruments  issued  by  corporations  and  governments  under 
the  corporate  or  governmental  seal  came  to  be  regarded  as 
negotiable.  But  not  all  bonds  are  negotiable.  Bonds  are  either 
"coupon  bonds"  or  "registered  bonds."  The  latter  are  bonds 
payable  to  a  specified  person  whose  name  is  registered  in 
the  books  of  the  corporation  or  government,  and  they  are 
transferable  only  by  registering  the  name  of  the  transferee. 
Coupon  bonds  are  bonds  payable  to  a  person,  or  order,  or 
bearer,  and  have  attached  to  them  coupon  notes  for  each 
installment  of  interest  as  it  falls  due.  These  coupons  are  cut 
off  and  presented  for  payment  of  interest,  or  they  may  be  sev- 
ered before  maturity  and  negotiated  like  a  promissory  note. 
The  negotiable  bond  is  usually  a  coupon  bond  payable  to 
bearer.  A  bond  is  a  quite  formal  instrument  containing  not 
only  the  negotiable  promise  but  also  specifications  concerning 
the  particular  issue  of  bonds  of  which  it  is  one,  and  the  mort- 
gage security  therefor.    Since  a  mortgage  cannot  well  be  made 


Bond  of  Corporation" 


Jl 


(<EJ)C  JflcttJ  i!?abcn  %l?atcr  Company,  a  corporation  duly  organized  \Mf 
and  existing  under  the  lazvs  of  the  State  of  Pennsylvania,  for  value  ~~ 
received  hereby  promises  to  pay  to  The  Safe  Deposit  Company  of  Pittsburgh, 
County  of  Allegheny,  in  the  State  of  Pennsylvania,  or  bearer,  the  sum  of 

e^Vjfive   "(Hundred   Bollars-^o 

lazvful  money  of  the  United  States  of  America,  on  the  first  day  of  October  in 
the  year  nineteen  hundred  and  five,  together  with  interest  on  said  sum  from 
the  date  hereof  at  the  rate  of  six  per  centum  per  annum,  payable  semi- 
annually on  the  first  days  of  October  and  April  in  each  year  at  the  office  of 
The  Safe  Deposit  Company  of  Pittsburgh,  in  the  State  of  Pennsylvania, 
on  presentation  of  the  coupons  hereto  attached  as  they  severally  become  due. 

(2tbis  b  onb  is  one  of  a  series  of  thirty  bonds,  nupi  bered  consecutively  from  one 
to  thirty,  both  numbers  inclusive,  each  of  the  denomination  of  five  hundred 
dollars,  all  being  of  like  tenor  and  date,  and  all  secured  by  first  mortgage 
upon  the  water  works  of  said  The  New  Haven  Water  Company,  in  and  near 
the  Borough  of  New  Haven,  in  Fayette  County,  Pennsylvania,  together 
with  lands,  machinery,  pipes,  properties,  rights,  privileges  and  franchises 
now  held  and  owned  or  hereafter  to  be  acquired  by  it,  and  all  its  tolls,  in- 
come, rents,  issues  and  profits,  executed  by  said  The  New  Haven  Water 
Company  to  The  Safe  Deposit  Company  of  Pittsburgh,  of  the  County  of 
Allegheny,  in  the  State  of  Pennsylvania,  Trustee,  and  dated  the  first  day 
of  October,  l88j,  and  duly  acknowledged  according  to  law  and  recorded  in 
the  proper  records  in  the  Recorder's  Office  in  Fayette  County,  in  the  State 
of  Pennsylvania.  This  bond  shall  not  become  obligatory  until 'authenticated 
by  the  execution  by  said  trustee  of  the  certificate  hereto  attached. 

%n  (ftcstimonj?  UPfocrcof,  the  said  The  New  Haven  Water  Company  has 
caused  this  instrument  to  be  sealed  with  its  Corporate  Seal,  and  to  be  signed 
by  its  Presidetit  and  Secretary  and  the  coupons  hereto  attached  to  be  signed 
by  its  Treasurer,  at  New  Haven  aforesaid  this  first  day  of  October,  1 88$. 

The  New  Haven  Water  Company, 


r 

\ 

CORPORATE 

SEAL 

fes 

-J 

By 

fo-kn,  o?.  &va>&tv&& 

President. 

And  by 

CvuqZwi  laidto&k, 

Secretary. 


L§97] 


NATURE  AND  CHARACTERISTICS 


179 


to  each  bondholder,  it  is  made  to  a  trustee  or  trustees  for  the 
benefit  of  bondholders.  The  bond  is  signed  by  the  proper  offi- 
cials and  usually  bears  the  corporate  or  governmental  seal.  But 
these  instruments  are  sometimes  issued  without  a  seal,  and 
although  when  so  issued  they  are  not  technically 
"bonds,"  they  are  nevertheless  classed  ^^,^77&&^L 
as  bonds. 

97.  Negotiable  Instruments  Law. 
The  law  of  negotiable  instruments 
has  been  codified  and  a  uniform 
act  passed  in  over  twenty  Ameri- 
can  states,1  one    territory,2  and 
the  District  of  Columbia.    It  is 
probable   that    it  will    also   be 
passed  in  other  states, 
thus  securing  uniform- 
ity throughout  the 


United  States  in 
the  law  of  this 
important  subject. 
This  Negoti 
able 


T^SKS^ To  -«  — ^  tym 

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"  "AFE  DEI 

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fj4     ON  THE    FIRST    DAY  OF    I  nri    [667 

nf>n.srj//,it.>i>t:lil.kxr<tyWtiffA,  ArK.  I  U  Q  f 
jWjjf^yTHE  Safe  DepositCompany//. 

'/ffifo/fyfl.'/bUiSy/MJtf,/,  //>/:ilVM '  iWJIM-l/ 'titfrtrxf  0 
,.        '  /T///r  FIRST  MORTGAGE  BONC 


I      y  I  ifll/S  FIRST  MORTGJ 


wwa/  lu&yrtf 


l0j4    on  the  first  day  of  npT  I  drib 

,'/<.;,', /"The  Safe  Dcp 
w/yft.'frjvrsyh'tmii/.  A>s 

*■-  RSJM. 


|x/r  (^04^4 


t  DepositCompany// 


MiH.'IAVLWJtfl'«qa 


sa  ii 


GUP  MMH»IHH:g«g 

s^^y;/£APR.ia9i 


I  c*wir/y*THE  Safe  D 

:  ///AV^/).^W.r/// 


>#£• 


te?.e>)LX„ 


mimm 


■tSUU&ll '  IX&TTSt  , 


Coupons 

Instruments  Law  will  be  followed  in  this  chapter.    It  supersedes 
the  common,  or  unwritten,  law  of  negotiable  instruments. 

This  law  is  based  upon  a  similar  codification  in  England 
known  as  the  Bills  of  Exchange  Act.  This  English  act  is  also 
in  force  in  most  of  the  English  colonies. 


1  Colorado,  Connecticut,  Florida,  Idaho,  Iowa,  Kansas,  Kentucky,  Louisiana, 
Maryland,  Massachusetts,  Michigan,  Missouri,  Montana,  Nebraska,  New  lersey, 
New  York,  North  Dakota,  North  Carolina,  Ohio,  Oregon,  Pennsylvania,  Rhode 
Island,  Tennessee,  Utah,  Virginia,  Washington,  Wisconsin,  Wyoming. 

2  Arizona. 


I  So  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 


II.  Form 

98.  What  a  negotiable  instrument  must  contain.  An  instru- 
ment to  be  negotiable  (and  not  merely  a  common  law  contract) 
must  conform  to  the  following  requirements. 

i.  It  must  be  in  writing  and  signed  by  the  maker  or  drawer. 
A  writing  includes  print,  and  the  writing  may  be  in  pencil. 

Examples :  i .  One  may  sign  in  a  trade  or  assumed  name.  Even  the 
indorsement  by  figures   I,   2,  8  has  been  held  sufficient. 

2.  Only  the  person  who  signs  is  liable.  The  signature  "  A.  B.,  agent,"  or 
"  C.  D.,  treasurer,"  binds  only  A.  B.  or  C.  D.  and  not  his  principal,  for  these 
are  mere  terms  of  description.  The  signature  should  be  "X.Y.,  by  A.  B., 
agent,"  or  "  X.  Y.  Co.,  by  A.  B.,  treasurer."  By  the  custom  of  banks  the 
signature  "  E.  F.,  cashier,"  binds  the  bank  whose  name  appears  on  the 
instrument. 

3.  A  forged  signature  does  not  bind  the  one  whose  name  is  forged.  No 
rights  can  be  acquired  by  any  holder  under  a  forged  signature. 

2.  It  must  contain  an  unconditional  promise  or  order  to  pay 
a  sum  certain  in  money.  A  promissory  note  contains  a  promise. 
A  bill  of  exchange,  or  check,  contains  an  order.  The  point  is 
that  these  must  be  unconditional. 

Examples  .-4.  "I  O  U  twenty  dollars "  is  not  a  promise  but  a  mere 
acknowledgment.     So  also,  "  Due  you  twenty  dollars." 

5.  "  Be  so  kind  as  to  let  the  bearer  have  twenty  dollars  "  may,  perhaps, 
be  too  civil  to  be  regarded  as  an  "  order." 

6.  "  I  promise  to  pay  to  order  of  A.  B.  twenty  dollars  out  of  proceeds  of 
Blackacre  farm  "  is  conditional  and  therefore  nonnegotiable.  There  may 
not  be  proceeds  from  that  farm  sufficient  to  pay. 

7.  "  Pay  to  order  of  A.  B.  twenty  dollars  and  charge  to  account  of  Black- 
acre  farm "  is  unconditional,  because  it  merely  indicates  the  fund  from 
which  reimbursement  is  to  be  made. 

8.  "  Pay  to  the  order  of  A.  B.  all  the  proceeds  of  Blackacre  farm"  is  non- 
negotiable  because  the  sum  is  uncertain.  But  the  law  permits  payment 
"  with  exchange  "  or  with  "  costs  of  collection  or  attorney's  fees  in  case  not 
paid  at  maturity,"  although  these  may  render  the  sum  uncertain.  It  also 
allows  payment  by  installments,  with  a  provision  that  upon  default  in  the 
payment  of  any  installment  the  whole  sum  shall  become  due. 

9.  "Deliver  to  order  of  A.  B.  100  bushels  of  wheat"  is  nonnegotiable 
because  not  payable  in  money, 


§9S]  FORM  l8l 

10.  The  instrument  may  specify  a  particular  kind  of  money,  as  gold 
coin,  silver  dollars,  greenbacks,  or  a  foreign  money,  as  Mexican  silver 
dollars.  There  has  been  much  conflict  as  to  whether  instruments  payable 
in  "current  funds"  are  negotiable,  since  current  funds  may  include  the 
promissory  notes  of  banks  (i.e.  bank  notes),  which  are  themselves  merely 
negotiable  instruments.  If  payable  in  any  kind  of  legal-tender  money  there 
could  be  no  question  ;  but  current  funds  include  more  than  legal-tender 
money,  and  courts  have  differed  as  to  whether  that  phrase  is  the  equivalent 
of  money. 

3.  It  must  be  payable  on  demand  or  at  a  fixed  or  determi- 
nable future  time. 

Examples:  II.  "On  demand,  pay,  etc.";  "At  sight,  pay,  etc,"  are 
payable  on  demand.  So  also  if  no  time  for  payment  is  expressed  the 
instrument  is  payable  on  demand.  Such  instruments  are  due  at  once  and 
become  overdue  after  the  expiration  of  a  reasonable  time. 

12.  "Thirty  days  after  date";  "On  or  before  Jan.  1,  1905  ";  "  Within 
one  year  after  my  death";  these  are  all  fixed  or  determinable  dates.  "  When 
A.  B.  is  twenty-one "  is  not,  because  A.  B.  may  never  reach  that  age. 
"  Thirty  days  after  sight,  etc.,"  is  determinable. 

4.  It  must  be  payable  to  order  or  to  bearer. 

Examples :  13.  "I  promise  to  pay  A.  B.  twenty  dollars"  is  nonnego- 
tiable. 

14.  "I  promise  to  pay  A.  B.  or  order  twenty  dollars  "  is  negotiable  when 
indorsed  by  A.  B. 

15.  "I  promise  to  pay  the  bearer  twenty  dollars"  is  negotiable  without 
any  indorsement. 

16.  "I  promise  to  pay  cash  twenty  dollars  "  is  payable  to  bearer. 

17.  If  the  payee  is  known  by  the  maker  to  be  a  fictitious  person,  the 
instrument  is  payable  to  bearer. 

iS.  When  an  instrument  payable  to  the  order  of  A.  B.  is  indorsed  in 
blank  by  A.  B.  it  is  then  payable  to  bearer.  An  indorsement  is  in  blank 
when  A.  B.  simply  writes  his  name  upon  the  back  of  the  instrument. 

19.  An  instrument  may  be  made  payable  to  the  order  of  the  maker,  or 
drawer,  or  drawee,  or  two  or  more  persons  jointly. 

5.  If  the  instrument  is  a  bill  of  exchange,  it  must  name  or 
otherwise  indicate  the  drawee  with  reasonable  certainty. 

Examples :  20.  "  To ,  Mobile,  Alabama,"  is  not  a  bill  because  the 

drawee  is  neither  named  nor  indicated. 

21.  "To  the  owner  of  the  steamer  Dorrance "  is  sufficient  because  the 
drawee  is  indicated,  though  not  named. 


182  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

99.  What  a  negotiable  instrument  must  not  contain.  The  rule 
and  the  exceptions  upon  this  point  may  be  stated  as  follows. 

i.  Rule.  Subject  to  the  exceptions  enumerated  below,  a  nego- 
tiable instrument  must  not  contain  a  promise  or  an  order  to 
do  any  act  in  addition  to  the  payment  of  money. 

Examples:  i.  "I  promise  to  pay  to  the  order  of  A.  B.  fifty  dollars 
and  also  deliver  to  his  order   ioo  bushels  of  wheat,"  is  nonnegotiable. 

2.  "  Pay  to  A.  B.  or  order  fifty  dollars  and  also  deliver  to  him  my  horse 
Billy  B.,"  is  nonnegotiable. 

2.  Exceptions.    The  exceptions  to  this  rule  are  given  below. 

(a)  The  instrument  may  give  the  Ao/deran  election  to  require 
something  to  be  done  in  lieu  of  the  payment  of  money.  In 
such  case  the  maker  promises  the  payment  of  money  and  has 
no  election  to  do  anything  else.  The  holder  may  require  the 
payment  of  the  money,  but  he  may  if  he  chooses  take  some- 
thing in  place  of  it. 

Example  3.  "  I  promise  to  pay  to  the  order  of  A.B.  fifty  dollars,  or  at  his 
election  deliver  to  him  100  bushels  of  wheat,"  is  negotiable. 

(0)  The  instrument  may  authorize  the  sale  of  collateral 
securities  in  case  of  nonpayment  at  maturity.  The  note  given 
to  a  bank  that  lends  money  on  collateral  security  usually  con- 
tains a  provision  for  the  sale  of  the  securities  in  case  of  default 
in  payment. 

(c)  The  instrument  may  authorize  the  confession  of  judgment 
upon  nonpayment  at  maturity.  Judgment  notes  are  not  used 
in  some  states,  but  where  they  are  in  use  the  Negotiable 
Instruments   Law  regards  them  as  negotiable. 

(d)  The  instrument  may  waive  the  benefit  of  any  law  intended 
for  the  advantage  or  protection  of  the  maker  unless  such  waiver 
is  forbidden  by  the  statute  creating  the  exemption.  In  some 
states  it  is  allowable  to  insert  a  clause  waiving  the  benefits  of 
homestead  and  exemption  laws. 

100.  Nonessentials.  There  are  certain  things  which  may  or 
may  not  appear  in  a  negotiable  instrument,  and  their  presence 
or  absence  will  not  affect  its  negotiability. 


§ioi]  FORM  183 

1.  Statement  of  consideration.  A  negotiable  instrument  need 
not  state  that  any  value  was  given.  It  is  usual  to  insert  the 
words  "for  value  received,"  but  this  is  not  necessary  to  its 
validity,  and  the  instrument  has  a  presumptive  consideration 
without  the  use  of  these  or  equivalent  words.  In  some  states 
there  are  special  statutes  requiring  that  the  consideration  shall 
be  stated  in  negotiable  instruments  given  for  patent  rights,  and 
these  statutes  must  be  observed.  An  instrument  is  not  rendered 
nonnegotiable  merely  because  it  states  the  consideration,  as,  for 
instance,  if  it  reads,  "  In  payment  for  one  horse  I  promise  to 
pay,  etc." 

2.  Date.  A  negotiable  instrument  need  not  be  dated.  If  it 
is  issued  undated,  the  true  date,  which  is  the  date  when  issued, 
may  be  inserted  by  any  holder.  The  insertion  of  a  wrong  date 
binds  prior  parties  in  favor  of  a  holder  who  afterwards  takes 
the  instrument  for  value  and  without  notice  of  the  error.  It  is 
always  best  to  date  a  negotiable  instrument  in  order  to  avoid 
difficulties. 

3.  Place.  A  negotiable  instrument  need  not  state  the  place 
where  it  is  drawn  nor  the  place  where  it  is  payable.  It  is,  of 
course,  best  to  insert  the  place  and  the  date,  but  these  are  not 
essentials. 

4.  Effect  of  seal.  A  sealed  instrument  is  generally  nonnego- 
tiable, but  the  seal  of  a  corporation  or  municipality  is  regarded 
as  part  of  the  signature  and  does  not  affect  the  negotiability  of 
commercial  paper  or  negotiable  bonds.  The  Negotiable  Instru- 
ments Law  extends  this  doctrine  to  private  seals ;  but  this  is 
probably  limited  to  the  case  where  there  is  merely  a  signature 
followed  by  a  seal,  and  might  not  extend  to  a  case  where  there 
is  a  full  recital  of  the  seal,  as  where  the  instrument  reads, 
"  In  witness  whereof,  I  have  hereto  affixed  my  hand  and  seal." 
Negotiable  bonds  are  usually  sealed. 

101.  Effect  of  blanks.  If  an  instrument  is  issued  with  blanks, 
a  person  who  takes  it  has  notice  that  it  is  to  be  filled  up,  and 
is  put  upon  inquiry  as  to  how  it  is  to  be  filled.  Any  holder 
may  fill  the  blanks  in  accordance  with  the  authority  given ;  if 
he  fills  them  in  excess  of  that  authority,  he  cannot  recover  upon 


1 84  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

the  instrument.  But  if  he  fills  them  in  excess  of  the  authority 
and  then  transfers  the  completed  instrument  to  a  holder  for 
value  and  without  notice,  the  prior  parties  are  liable  to  such 
holder.  It  is  better  that  one  who  puts  out  an  incomplete  instru- 
ment should  suffer  loss  than  that  the  innocent  purchaser  should 
suffer  it.  A  space  which  the  writing  does  not  completely  fill, 
as  the  space  for  the  amount,  is  not  a  blank  if  something  be 
written  in   it. 

Examples  :  I.  A.  B.  indorses  C.  D.'s  note  with  the  amount  left  blank,  and 
authorizes  C.  D.  to  fill  it  up  for  an  amount  necessary  to  renew  another  note 
then  due  ;  this  amount  is  in  fact  $240.  C.  D.  fills  up  the  note  for  $1000 
and  discounts  it  at  a  bank  which  knows  nothing  of  these  facts.  A.  B.  is 
liable  to  the  bank  as  indorser  for  #1000. 

2.  A.  B.  draws  and  delivers  to  C.  D.  a  check  with  the  amount  left  blank, 
and  authorizes  C.  D.  to  write  in  an  amount  not  exceeding  $100.  C.  D.  writes 
in  $500  and  the  bank  pays  the  check.    A.  B.  must  suffer  the  loss. 

3.  A.  B.  draws  and  delivers  to  C.  D.  a  check  for  $2  upon  a  printed  form 

thus:  "Two Dollars."    CD.  writes  in  the  word 

"  hundred  "  and  changes  the  figures  to  correspond  :   "  Two  hundred 

Dollars."  The  bank  pays  C.  D.  $200.  This  is  alteration,  not  filling  a  blank. 
The  loss  is  that  of  the  bank,  although  some  states  say  that  A.  B.  may  be 
estopped  to  set  up  the  alteration  if  he  has  by  his  negligent  manner  of  draw- 
ing the  check  "invited"  alterations.  The  general  rule  is  that  the  alteration 
destroys  the  instrument  ;  but  the  Negotiable  Instruments  Law  allows  a 
holder  in  due  course  to  recover  upon  it  for  the  original  amount,  and  under 
this  law  the  bank  could  charge  A.  B.'s  account  with  $2. 

102.  Delivery.  Ordinarily  a  negotiable  instrument  must  be 
delivered  in  order  to  be  valid.  As  between  immediate  parties, 
such  as  maker  and  payee,  indorser  and  indorsee,  this  rule  is 
absolute  ;  but  as  between  a  prior  party,  as  maker,  and  a  remote 
purchaser  for  value  without  notice,  a  valid  delivery  by  the  maker 
to  the  payee  is  conclusively  presumed  if  the  instrument  was 
completed  by  the  maker  but  not  if  it  was  incomplete. 

Examples :  1.  A.B.  makes  a  promissory  note  payable  to  the  order  of 
C.  D.  and  leaves  it  on  his  desk.  C.  D.  takes  possession  of  it  without  A.  B.'s 
consent.     CD.  cannot  recover  against  A.  1).  because  there  was  no  delivery. 

2.  In  the  above  case  C.  D.  indorses  the  note  and  transfers  it  to  E.  F.,  who 
is  a  holder  in  due  course.  E.  F.  may  recover  against  A.  15.  The  case  would 
be  the  same  if  A,B,  locked  the  instrument  in  his  desk  or  safe  and  CD. 


§io3]  NEGOTIATION  1 85 

broke  in  and  took  it.  It  is  especially  dangerous  to  keep  undelivered  com- 
pleted  instruments  payable  to  bearer,  because  any  thief  by  getting  pos- 
session of  such   an  instrument  could  give  good  title  to  it. 

3.  If  in  the  above  case  the  instrument  was  incomplete  in  some  respect, 
and  it  was  stolen,  completed  by  filling  blanks,  and  negotiated,  the  maker 
would  not  be  liable. 

III.  Negotiation 

103.  Negotiation ;  indorsement ;  delivery.  Negotiation  may- 
be by  indorsement  and  delivery,  or  by  delivery  alone,  according 
as  the  instrument  does  or  does  not  require  an  indorsement. . 

1.  Negotiation.  An  instrument  is  negotiated  when  it  is  trans- 
ferred from  one  person  to  another  in  such  manner  as  to  con- 
stitute the  transferee  the  holder  thereof.  If  payable  to  bearer, 
or  if  the  last  indorsement  is  in  blank,  it  may  be  negotiated  by 
delivery,  the  same  as  money.  If  payable  to  order,  it  is  nego- 
tiated by  the  indorsement  of  the  holder,  followed  by  delivery. 
Indorsements  are  written  on  the  back  of  the  instrument.  If 
that  is  filled,  another  strip  called  an  "  allonge  "  is  attached  and 
the  indorsements  are  continued  upon  that. 

2.  Indorsement.  Indorsements  may  be  either  special  or  in 
blank,   and  may  be  unqualified  or  qualified  or  restrictive. 

(a)  A  special  indorsement  specifies  the  indorsee,  as  "  Pay  to 
E.  F.  A.  B."  This  could  not  again  be  negotiated  without 
E.  F.'s  indorsement. 

(b)  A  blank  indorsement  specifies  no  indorsee.  The  indorser 
simply  writes  his  name  on  the  back  of  the  instrument,  and  it 
then  becomes  payable  to  bearer.  Any  holder  may,  however, 
convert  this  into  a  special  indorsement  by  writing  "  Pay  to  (his 
name)"  over  the  blank  indorsement. 

(c)  An  unqualified  or  unrestricted  indorsement  places  no 
restriction  upon  the  further  negotiation  of  the  instrument  or 
upon  the  indorser's  liability.  The  indorsements  given  above  are 
unqualified  and  unrestricted. 

(d)  A  qualified  indorsement  simply  passes  title  without 
rendering  the  indorser  liable  upon  the  paper.  The  form  used 
for   this    purpose    is    "without   recourse,"   written   above    the 


!86  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

indorser's  name.  This  does  not  impair  the  negotiability  of  the 
paper;  it  simply  exempts  this  indorser  from  liability  upon  it. 

(e)  A  restrictive  indorsement  constitutes  the  indorsee  an 
agent  of  the  indorser  —  usually  for  the  collection  of  the  paper. 
The  form  commonly  used  is  "Pay  to  E.F.  for  collection.  A.B." 
Other  forms  are  :  "  Pay  to  E.  F.  only.  A.  B. " ;  "  Pay  to  the  X. 
Bank  for  deposit  only."  This  indorsement  is  notice  that  A.B. 
owns  the  paper,  and  practically  prohibits  further  negotiation 
except  for  collection  purposes.  The  indorsee  may  receive  pay- 
ment or  may  transfer  to  another  person  who  is  to  receive 
payment;  but  there  cannot  subsequently  be  a  holder  in  due 
course  free  from  the  claims  of  A.B. 

The  indorser  may  waive  presentment,  notice,  and  protest  by 
so  specifying  above  his  indorsement.  The  phrase  "waiving 
protest"  is  ordinarily  used  for  this  purpose.  This  waives  the 
conditions  in  his  contract  (see  sec.  no). 

A  transfer  without  indorsement  of  paper  payable  to  order 
is  a  mere  assignment  and  not  a  negotiation.  The  transferee  is 
entitled,  however,  to  have  the  indorsement  of  the  transferror, 
and  negotiation  takes  effect  from  the  time  he  secures  it. 

The  last  transferee  or  indorsee  is  the  holder.  He  may  be  a 
"holder  in  due  course"  or  "not  a  holder  in  due  course,"  and 
his  rights  may  depend  upon  his  position  in  this  respect. 

Examples  of  Indorsements 

[Refer  to  the  promissory  note  on  p.  174.] 

Blank  indorsement :  Robert  H.  Moore  &  Co. 

Special  indorsement:  Pay  to  order  of  John  Spearing. 

Robert  H.  Moore  &  Co. 

Qualified  indorsement:        Without  recourse. 

Robert  H.  Moore  &  Co. 
or 
Pay  to  John  Spearing,  without  recourse. 
Robert  H.  Moore  &  Co. 

Restrictive  indorsement:     Pay  to  John  Spearing  for  collection. 

Robert  H.  Moore  &  Co. 


§io4]  NEGOTIATION  187 

Waiving  conditions  :  Waiving  protest. 

Robert  H.  Moore  &  Co. 
or 
Pay  to  John  Spearing,  waiving  protest. 
Robert  H.  Moore  &  Co. 

The  indorsee  may  indorse  to  another  and  he  to  another,  and  so  on. 

Successive  indorsements  :  Pay  to  John  Spearing. 

Robert  H.  Moore  &  Co. 
Pay  to  Ralph  Lear. 

John  Spearing. 
Pay  to  Goldberg  &  Morton. 

Ralph  Lear. 
etc.,  etc.,  etc. 


104.  Holder  in  due  course.  A  holder  in  due  course  is  a  holder 
who  takes  completed  and  regular  paper  before  maturity  in  good 
faith  and  for  value  and  without  notice  of  any  defects  or  defenses. 
He  is  often  called  a  "  bona  fide  holder  for  value  without  notice." 
The  phrase  "  holder  in  due  course  "  is  used  in  the  Negotiable 
Instruments  Law.  In  order  to  be  a  holder  in  due  course  a  trans- 
feree must  take  the  instrument  under  the  following  conditions. 

1 .  The  instrument  must  be  complete  and  regular  upon  its  face. 
Any  blank,  any  erasure,  any  irregularity,  indicates  that  the 

paper  is  not  issued  in  the  usual  course  of  business,  is  not  in 
conformity  with  business  usage,  and  the  holder  is  put  upon 
inquiry  by  this  fact.  As  to  what  appears  upon  the  face  of  the 
paper  the  rule  is  caveat  emptor,  — let  the  buyer  beware. 

2.  The  instrument  must  not  be  overdue. 

When  the  instrument  is  payable  at  a  fixed  time  its  due  date 
is  certain.  A  transfer  on  the  day  of  maturity  is  before  the 
instrument  is  overdue. 

When  an  instrument  is  payable  on  demand  it  is  due  a  reason- 
able time  after  its  issue.  What  is  a  reasonable  time  is  a  ques- 
tion of  fact  to  be  determined  by  the  nature  of  the  instrument, 
the  usages  of  trade,  and  the  facts  of  the  particular  case.  No 
case  shows  that  more  than  three  months  can  be  allowed,  and 
some  cases  have  held  three  months  to  be  too  long ;  some  states 
by  statute  specify  what  is  to  be  regarded  as  a  reasonable  time 


j38  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

in  the  case  of  paper  payable  on  demand.  A  promissory  note 
payable  on  demand  is  due  without  regard  to  intermediate 
negotiations,  but  a  bill  of  exchange  payable  on  demand,  if  nego- 
tiated at  reasonable  intervals,  is  due  within  a  reasonable  time 
after  the  last  negotiation. 

3.  The  holder  must  take  the  instrument  in  good  faith  and 
for  value. 

Bad  faith  may  be  gathered  from  circumstances,  as  where  an 
instrument  to  which  the  maker  has  a  good  personal  defense  is 
transferred  for  a  sum  so  out  of  proportion  to  its  face  value  as 
to  raise  a  suspicion  of  collusion.  Such  grossly  inadequate  con- 
sideration may  be  evidence  of  bad  faith  and  is  to  be  considered 
in  deciding  that  question  of  fact.  Taking  a  note  with  an  actual 
suspicion  that  there  is  some  defect  in  the  transferror's  title  is 
taking  in  bad  faith  even  if  full  value  be  given. 

Value  is  any  consideration  sufficient  to  support  a  common 
law  contract.  If  the  holder  suffers  any  detriment  in  taking  the 
instrument,  he  has  furnished  value.  The  disputed  question  has 
been  whether  the  taking  by  C  of  a  negotiable  instrument  made 
by  A,  and  owned  by  B,  as  collateral  security  for  an  antecedent 
debt  due  from  B  to  C,  constitutes  C  a  holder  in  due  course. 
New  York  and  some  other  states  have  held  that  it  does  not, 
while  the  United  States  Supreme  Court  and  the  courts  of  many 
states  have  held  that  it  does.  The  Negotiable  Instruments 
Law  sought  to  adopt  the  rule  that  it  does,  but  the  language 
used  was  held  by  a  New  York  court  ineffective  for  this  purpose. 
It  is  argued  that  C  suffers  no  very  real  detriment  in  taking  the 
instrument  merely  as  security  for  an  antecedent  debt.  If  C 
took  it  as  security  for  a  contemporaneous  debt,  or  in  payment 
of  a  past  debt,  or  as  security  for  a  binding  extension  of  time 
upon  the  old  debt,  there  would  clearly  be  a  detriment  to  C 
sufficient  to  constitute  value. 

Example  1.  "  New  York  City,  Jan.  5,  1905.  Three  months  after  date  I 
promise  to  pay  to  the  order  of  13  one  hundred  dollars,  value  received.  A." 
On  Feb.  10  B  indorses  and  delivers  the  above  instrument  to  C  as  collateral 
security  for  a  prior  debt  he  owed  to  C.  When  the  note  is  due  C  sues  A 
upon  it  and  A  sets  up  that   B  procured  it  by  fraud.     If  C  is  a  holder   for 


§105]  NEGOTIATION  189 

value  (and  without  notice  of  the  fraud),  this  defense  is  not  good  against 
him  ;  otherwise  it  is  good.  Is  he  a  holder  for  value?  In  New  York  and  in 
several  other  states  it  is  held  that  he  is  not,  while  in  the  federal  courts  and 
in  many  states  it  is  held  that  he  is.  But  if  on  February  10  C  took  the  note 
in  payment  of  a  past  debt,  or  as  security  for  a  debt  then  contracted,  he 
would  undoubtedly  be  a  holder  for  value. 

4.  The  holder  must  not  at  the  time  of  the  negotiation  to  him 
have  notice  of  any  infirmity  in  the  instrument  or  defect  in  the 
title  of  his  transferror. 

Notice  in  the  law  of  negotiable  instruments  means  actual 
knowledge  or  knowledge  of  such  facts  as  to  constitute  bad 
faith.  It  is  the  state  of  the  holder's  mind  that  is  important. 
Negligence,  even  gross  negligence,  is  not  notice,  although  it 
may  be  evidence  of  bad  faith.  The  question  is  not,  Would  an 
ordinarily  prudent  man  in  like  circumstances  have  had  notice 
or  have  had  a  suspicion  of  some  defect  ?  but,  Did  this  holder 
have  notice  or  have  a  suspicion? 

The  title  of  the  transferror  is  defective  when  he  obtains  the 
instrument  or  any  signature  thereto  by  fraud,  duress,  or  other 
unlawful  means,  or  for  an  illegal  consideration,  or  negotiates  it 
in  breach  of  faith  or  under  circumstances  amounting  to  fraud. 

5.  A  holder  who  derives  title  through  a  holder  in  due  course 
is  himself  a  holder  in  due  course,  even  though  he  does  not 
comply  with  the  above  requirements. 

Example  2.  B  procures  from  C  a  negotiable  instrument  by  fraud. 
B  negotiates  it  to  D  who  is  a  holder  in  due  course.  D  negotiates  it  to  E,  who 
has  knowledge  of  the  fraud  (but  is  not  a  party  to  it).  E  is  a  holder  in  due 
course  with  all  the  rights  of  D.  This  rule  protects  D,  the  holder  in  due 
course,  who  otherwise  might  have  the  instrument  locked  up  in  his  hands 
after  knowledge  of  the  fraud  became  general.  But  if  D  negotiated  it  back 
to  B,  the  latter  would  not  be  a  holder  in  due  course,  because  he  was  a  party 
to  the  fraud. 

105.  Rights  of  holder  in  due  course.  The  following  rules  gov- 
ern the  rights  of  a  holder  in  due  course. 

1.  The  holder  in  due  course  holds  the  instrument  free  from 
all  personal  defenses  and  may  enforce  payment  for  the  full 
amount  against  all  parties  liable  upon  it ;  but  he  does  not  hold 
it  free  from  the  absolute  defenses. 


I9o  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

(a)  Personal  defenses  are  fraud,  duress,  illegality  not  made 
an  absolute  defense  by  statute,  want  of  consideration,  release 
of  maker  or  other  party,  want  of  title  in  the  transferror,  etc. 

Examples :  i.  B  purloins  a  negotiable  instrument  payable  to  bearer 
and  negotiates  it  to  C,  a  holder  in  due  course.  C  may  recover  upon  it  and 
may  hold  it  even  against  the  true  owner.  It  is  in  the  latter  respect  on  the 
same  basis  as  stolen  money. 

2.  B  induces  A  by  a  false  representation  to  buy  a  horse,  and  A  gives 
B  his  promissory  note  for  $100.  B  negotiates  the  note  to  C,  a  holder  in 
due  course.  C  may  recover  the  full  amount.  A  cannot  set  up  B's  fraud 
against  C. 

3.  B  gets  A  to  make  a  promissory  note  without  any  consideration  what- 
ever. B  negotiates  it  to  C,  a  holder  for  value.  C  may  recover  from  A 
upon  it. 

4.  A  anticipates  the  due  date  of  his  note  and  pays  B  in  full,  leaving  the 
note  in  B's  hands.  Before  it  is  due  B  negotiates  it  to  C,  a  holder  in  due 
course.    A  must  pay  it  again  to  C. 

(b)  Absolute  defenses  are  forgery,  alteration,  infancy,  ille- 
gality when  made  an  absolute  defense  by  statute,  want  of  exe- 
cution and  delivery  as  and  for  a  negotiable  instrument,  etc. 

Examples:  5.  A  gives  to  B  a  negotiable  instrument  for  a  gambling 
debt.  B  negotiates  it  to  C,  a  holder  in  due  course.  C  cannot  recover  upon 
it  in  those  states  which  by  statute  have  made  instruments  given  for  gam- 
bling debts  void.  (The  Negotiable  Instruments  Law  has  sought  to  change 
the  rule  as  to  such  absolute  defenses  as  statutory  illegality  in  gambling, 
usury,  etc.,  and  some  courts  have  given  effect  to  it  as  substantially  repealing 
the  statutes  making  such  instruments  void ;  but  at  present  it  is  unsafe  to 
say  that  this  will  be  the  general  result.) 

6.  A  is  asked  by  B  to  sign  a  lease.  By  a  trick  B  substitutes  a  negotiable 
promissory  note,  which  A  signs,  thinking  it  is  the  lease.  B  negotiates  the 
note  to  C,  a  holder  in  due  course.  C  cannot  recover  upon  it  unless  he 
shows  that  A  was  so  negligent  as  to  work  an  estoppel.  The  defense  is 
absolute  unless  A  is  estopped  by  his  own  negligence  to  set  it  up  against 
an  innocent  holder.  There  was  no  execution  and  delivery  as  and  for 
a  negotiable  note. 

7.  A  gives  to  B  a  note  for  $10.  B  alters  it  to  read  $100  and  negotiates 
it  to  C,  a  holder  in  due  course.  C  cannot  recover  upon  it.  Alteration  is  an 
absolute  defense.  (The  Negotiable  Instruments  Law  has  now  provided 
that  C  may  recover  upon  it  according  to  its  original  tenor,  namely,  to  the 
extent  of  $10.) 


§§io6, 107]     MAKER'S  AND  ACCEPTOR'S  CONTRACT  191 

2.  Every  holder  is  deemed  presumptively  to  be  a  holder  in 
due  course.  But  when  fraud,  duress,  illegality,  or  defective 
title  has  been  proved  by  way  of  defense,  the  holder  must  then 
show  by  proof  that  he  gave  value,  and  must  show  the  circum- 
stances under  which  he  took  the  instrument. 

Example  S.  C,  the  holder,  brings  an  action  against  A,  the  maker. 
C  proves  A's  signature,  introduces  the  note  in  evidence,  and  rests  his  case. 
This  is  all  the  proof  necessary,  as  there  is  presumption  of  consideration  and 
presumption  that  C  is  a  holder  in  due  course.  But  if  A  now  proves  that  the 
note  was  obtained  by  B  by  fraud  or  for  an  illegal  consideration,  then  C 
must  prove  the  value  he  gave  and  establish  good  faith  and  want  of  notice 
by  proving  the  circumstances  under  which  he  took  the  note. 

IV.  Maker's  and  Acceptor's  Contract 

106.  Maker's  contract  on  a  promissory  note.  The  maker  of  a 
promissory  note  contracts  that  he  will  pay  it  absolutely.  No 
step  is  necessary  to  fix  the  maker's  liability.  The  holder  need 
not  for  this  purpose  seek  the  maker  or  present  the  note  to  him. 
If  it  is  not  paid  at  maturity,  the  holder  may  at  once  bring  an 
action  against  the  maker  and  recover  from  him. 

Presentment  to  the  maker  at  maturity  is  necessary  to  fix  the 
liability  of  an  indorser  but  not  to  fix  the  liability  of  the  maker 
himself. 

107.  Acceptor's  contract  on  a  bill  of  exchange.  An  acceptor's 
contract  is  absolute.  It  may  be  upon  the  bill  or  in  a  separate 
instrument.     Only  the  drawee  can  accept. 

1.  The  contract.  When  the  drawee  of  a  bill  of  exchange 
accepts  it  by  writing  his  name,  usually  with  the  word 
"  Accepted,"  across  the  face  of  the  bill,  he  thereby  undertakes 
that  he  will  pay  the  bill  according  to  the  terms  of  his  accept- 
ance. He  also  admits  that  the  drawer's  signature  is  genuine 
and  cannot  afterwards  dispute  that  point.  An  acceptance  may 
be  general  or  qualified. 

(a)  If  the  acceptance  is  general  and  unqualified,  the  acceptor 
agrees  to  pay  according  to  the  tenor  of  the  bill,  that  is,  he 
assents  fully  to  the  order  of  the  drawee.  He  is  then  liable  like 
the  maker  of  a  promissory  note. 


I92  NEGOTIABLE  INSTRUMENTS  [Ch.IX 

(b)  If  the  acceptance  is  qualified,  the  acceptor  changes  the 
tenor  of  the  bill,  that  is,  does  not  assent  fully  to  the  order  of 
the  drawer.  An  acceptance  is  qualified  which  makes  payment 
depend  upon  any  condition,  or  is  for  only  a  part  of  the  amount 
specified,  or  changes  the  time  of  payment,  or  positively  changes 
the  place  of  payment.  Changing  the  place  of  payment  does 
not  necessarily  qualify  the  acceptance  so  long  as  the  new  place 
is  not  made  the  exclusive  place  of  payment.  "  An  acceptance 
to  pay  at  a  particular  place  is  a  general  acceptance  unless  it 
expressly  states  that  the  bill  is  to  be  paid  there  only  and  not 
elsewhere."  The  holder  may  refuse  to  take  a  qualified  accept- 
ance and  may  protest  the  bill  for  nonacceptance.  If  he  does 
take  it,  he  releases  the  drawer  and  prior  indorsers  unless  they 
also  assent  to  it  or  after  due  notice  of  it  fail  to  dissent. 

Examples : 

New  York,  Feb.  27,  1905. 

$500  J  J 

Thirty  days  after  sight  pay  to  the  order  of  Foster  McKinnon  five  hundred 
dollars,  and  charge  to  the  account  of  Albert  Howard. 

To  John  Drury, 
Chicago. 

1.  "Accepted,  March  6.  John  Drury."  This  is  a  general  acceptance. 
The  date  of  acceptance  should  be  added  to  fix  the  due  date,  since  the  bill 
is  payable  not  thirty  days  after  date  but  thirty  days  after  sight.  It  is  due 
thirty  days  from  March  6,  namely,  on  April  5. 

2.  "Accepted,  March  6,  1905,  payable  at  the  Franklin  National  Bank. 
John  Drury."  This  is  still  a  general  acceptance,  although  it  specifies 
a  place  of  payment  and  to  that  extent  qualifies  the  bill.  Custom  has 
permitted  this. 

3.  "Accepted,  March  6,1905;  payable  at  the  Franklin  National  Bank 
only.  John  Drury."  This  is  qualified.  It  positively  changes  the  place 
of  payment,  which  by  the  tenor  of  the  bill  would  be  at  the  drawee's  place  of 
business. 

4.  "Accepted,  March  6,  1905,  when  in  funds.  John  Drury."  This 
is  qualified.    There  is  a  condition  which  may  never  be  fulfilled. 

5.  "Accepted,  March  6,  1905,  for  $350.  John  Drury."  This  is  qual- 
ified.   It  changes  the  amount. 

6.  "Accepted,  March  6,  1905,  payable  April  15,  1905.  John  Drury." 
This  is  qualified.  It  changes  the  time  of  payment  from  thirty  days  after 
sight  to  forty  days  after  sight. 


§io7]  MAKER'S  AND  ACCEPTOR'S  CONTRACT  193 

If  the  holder  takes  acceptance  3,  4,  5,  or  6,  he  releases  the  drawer  from 
liability  unless  after  due  notice  of  the  kind  of  acceptance  the  drawer  fails 
within  a  reasonable  time  to  dissent.  If  the  holder  will  not  take  these 
acceptances,  he  must  protest  the  bill  and  give  the  drawer  due  notice  of 
dishonor. 

2.  Acceptance  by  separate  writing.  Letter  of  credit.  The 
holder  is  entitled  to  have  the  drawee  accept  upon  the  bill 
itself,  and  may  treat  the  bill  as  dishonored  if  he  refuses  to  do 
so.  But  an  acceptance  on  a  separate  sheet  of  paper  is  perfectly- 
valid  and  binds  the  acceptor  in  favor  of  the  holder  and  all  who 
afterwards  take  the  bill  on  the  strength  of  such  acceptance. 
Moreover,  there  may  be  a  promise  in  writing  to  accept  a  bill  or 
bills  thereafter  to  be  drawn,  and  this  binds  the  acceptor  in  favor 
of  all  who  take  the  bill  or  bills  for  value  upon  the  faith  of  such 
a  written  promise.  A  "letter  of  credit"  issued  to  travelers  in 
order  to  enable  them  to  obtain  money  in  foreign  cities  is  merely 
a  banker's  written  promise  to  accept  bills  drawn  upon  him  up 
to  a  certain  amount. 

Example.  B,  who  is  going  abroad,  buys  of  a  New  York  banker  a  letter 
of  credit  for  ,£200.  The  letter  names  B,  often  describes  him,  contains  his 
signature,  and  says  to  foreign  bankers  that  the  New  York  bank  will  accept 
bills  drawn  upon  it  by  B  up  to  ,£200,  if  each  bill  refers  to  the  New 
York  bank's  "letter  of  credit  No. — ."  Each  draft  so  cashed  by  a  foreign 
bank  is  entered  upon  the  letter  of  credit,  so  that  the  balance  undrawn  is 
always  a  simple  matter  of  computation.  The  foreign  banker  compares  I5's 
signature  on  the  draft  with  the  signature  on  the  letter  and  satisfies  himself 
in  all  reasonable  ways  that  the  person  drawing  the  bill  is  the  person  named 
in  the  letter.  He  then  discounts  the  bill  and  forwards  it  to  New  York  (or 
it  may  be  by  arrangement  specified  in  the  bill,  to  London)  and  the  New 
York  banker  is  bound  to  pay  it  because  he  has  promised  in  advance  to  do 
so.  It  is  customary  for  New  York  banks  to  agree  that  these  bills  shall  be 
payable  at  some  London  bank,  since  London  is  the  great  financial  clearing 
house  for  the  whole  world. 

3.  Who  may  accept.  No  one  but  the  drawee  named  in  the 
bill  can  accept  it,  but  there  are  two  exceptions  to  this  rule. 
(a)  A  bill  may  refer  to  a  secondary  person  to  whom  resort 
shall  be  had  in  case  the  bill  is  dishonored  by  the  first  drawee. 
Such  a  person  is  called  a  "  referee  in  case  of  need."  The 
usual  form  is  to  write  below  the  drawee's  name,  "  In  case  of 


194  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

need  apply  to  G.  H."  It  is  in  the  option  of  the  holder  to 
resort  to  the  secondary  person,  (b)  When  the  bill  has  been 
dishonored  by  the  drawee  any  person  can  accept  it  for  the 
honor  of  the  drawer  or  a  prior  indorser.  This  acceptance  is 
called  "acceptance  supra  protest  for  honor."  Such  acceptor 
becomes  liable  to  the  holder  upon  condition  that  the  bill  be 
again  presented  to  the  drawee  at  maturity  for  payment,  and 
if  not  paid,  that  it  be  protested  and  due  notice  given  to  the 
acceptor  for  honor. 

108.  Presentment  of  bill  of  exchange  for  acceptance.  Present- 
ment for  acceptance  is  for  the  purpose  of  ascertaining  whether 
the  drawee  intends  to  pay  the  bill  when  it  is  due.  Presentment 
may  be  necessary  or  it  may  be  optional  with  the  holder. 

1.  When  necessary.  When  a  bill  is  payable  after  sight  it 
must  be  presented  for  acceptance  in  order  to  fix  its  maturity. 
A  failure  so  to  present  it  within  -a  reasonable  time  after  it  is 
issued,  or  after  its  last  negotiation,  would  discharge  the  drawer 
and  the  indorsers.  A  bill  payable  at  a  clay  certain  need  not  be 
presented  for  acceptance ;  it  is  enough  to  present  it  for  pay- 
ment when  that  day  arrives.  Such  a  bill  may,  however,  be  pre- 
sented for  acceptance  before  its  maturity,  if  the  holder  wishes 
to  do  so.  The  drawee  is  allowed  twenty-four  hours  to  decide 
whether  to  accept;  if  he  refuses  to  return  the  bill  thereafter, 
he  is  deemed  to  have  accepted. 

2.  Hozv  and  when.  Presentment  to  the  drawee  for  accept- 
ance must  be  by  or  on  behalf  of  the  holder  at  a  reasonable  hour 
of  a  business  day.  Presentment  cannot  be  on  holidays;  if  Sat- 
urday is  not  otherwise  a  holiday,  presentment  for  acceptance 
(but  not  for  payment)  may  be  made  before  twelve  o'clock  noon 
of  that  day.  Presentment  of  a  bill  naming  two  or  more  draw- 
ees must  be  made  to  all,  unless  they  are  partners,  when  pre- 
sentment to  one  is  sufficient.  Presentment  is  excused  if  the 
drawee  is  dead  or  has  absconded,  or  if  after  the  exercise  of 
reasonable  diligence  he  cannot  be  found. 

3.  Refusal  to  accept.  If  the  drawee  refuses  to  accept  the  bill, 
or  if  presentment  is  excused,  the  bill  is  said  to  be  dishonored. 
In  such  case  the  holder  must  give  due  notice  of  the  fact  to  the 


§§  ro9,  no]    DRAWER'S  AND  INDORSER'S  CONTRACT  195 

drawer  and  indorscrs  in  order  to  hold  them  liable  on  the  instru- 
ment ;  if  he  fails  to  do  so,  they  are  discharged.  If  the  bill  is 
a  foreign  bill,  the  holder  must  also  have  it  protested,  that  is, 
presented  by  a  notary  public  and  certified  by  him  as  duly 
presented  and  dishonored. 

4.  Effect  of  acceptance.  If  the  drawee  accepts  the  bill,  the 
holder  retains  it  until  maturity  or  negotiates  it,  and  then  he  or 
the  new  holder  presents  it  again  for  payment.  If  it  is  not  then 
paid,  the  bill  is  dishonored  and  must  be  protested  and  due 
notice  given  to  the  drawer  and  indorsers.  A  failure  to  take 
these  steps  discharges  the  drawer  and  prior  indorsers. 


V.   Drawer's  and  Indorser's  Contract 

109.  Drawer's  contract  on  a  bill  of  exchange.  The  drawer's 
contract  is  conditional.  He  undertakes  that  he  will  pay  the  bill 
on  these  conditions  :  (a)  that  it  be  duly  presented  to  the  drawee 
for  acceptance  or  payment  as  the  case  may  be  ;  {b)  if  it  be  dis- 
honored, that  due  notice  of  that  fact  be  given  to  him  ;  (c)  if  a 
foreign  bill  be  dishonored,  that  it  be  also  duly  protested. 

These  conditions  are  strict,  and  in  order  to  hold  a  drawer 
they  must  be  strictly  complied  with  unless  a  recognized  excuse 
be  shown  for  not  doing  so.  The  steps  necessary  to  fulfill  these 
conditions  are  treated  in  sees.  1 1 1-1 13  post. 

110.  Indorser's  contract  on  a  bill  or  note.  The  indorser's  con- 
tract is  both  a  contract  of  assurance  of  payment  and  a  contract 
of  warranty.  One  who  negotiates  without  indorsement  also 
gives  certain  implied  warranties. 

1.  Contract  to  pay.  An  indorser  by  an  unqualified  indorse- 
ment contracts  that  he  will  pay  the  bill  or  note  upon  these  con- 
ditions :  (a)  that  it  be  duly  presented  to  the  acceptor  or  maker 
for  payment,  or,  if  necessary,  to  the  drawee  for  acceptance ; 
{b)  if  it  be  dishonored,  that  he  be  given  due  notice  of  that  fact ; 
(c)  if  it  be  a  foreign  bill,  that  it  be  duly  protested.  A  qualified 
indorser  ("without  recourse")  does  not  undertake  any  contract 
to  pay,  but  he  does  undertake  a  contract  of  warranty. 


196  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

2.  Contract  of  warranty.  The  indorser  in  transferring  nego- 
tiable paper  also  impliedly  warrants  (a)  that  the  instrument  is 
genuine  and  in  all  respects  what  it  purports  to  be  ;  (b)  that  he 
has  good  title  to  it ;  (c)  that  all  prior  parties  had  capacity  to 
contract  ;  (d)  that  the  instrument  at  the  time  of  his  indorse- 
ment is  valid  and  subsisting.  An  indorser  by  qualified  indorse- 
ment, or  a  transferror  by  delivery  alone,  impliedly  makes  the 
same  or  substantially  the  same  warranties.  The  sale  of  a  nego- 
tiable instrument  is  in  some  respects  like  the  sale  of  a  chattel 
and  has  warranties  accompanying  the  sale. 

Examples :  i.  B  by  delivery  without  any  indorsement  sells  to  C  a  note 
of  A  payable  to  bearer.  Unknown  to  either  party  A's  name  is  forged. 
C  may  maintain  an  action  against  B  for  breach  of  the  implied  warranty 
of  genuineness.  The  same  result  would  follow  if  B  had  indorsed  "  without 
recourse"  or  had  made  an  unqualified  indorsement.  In  the  latter  case, 
however,  he  would  have  been  sued  upon  his  contract  to  pay. 

2.  In  the  above  case,  instead  of  forgery  A  pleads  infancy  and  escapes 
liability.  B  is  liable  to  C  for  breach  of  the  warranty  that  prior  parties  had 
capacity  to  contract.  So  also  if  A  pleads  that  the  note  was  given  for  a 
gambling  debt  and  thus  escapes  liability,  B  is  liable  for  breach  of  the  war- 
ranty that  it  is  valid.  The  Negotiable  Instruments  Law,  however,  makes  a 
seller  by  delivery  or  by  qualified  indorsement  liable  in  such  case  only  if  he 
knows  the  instrument  is  invalid. 

3.  Order  of  Endorsers'  liability.  If  there  are  several  indors- 
ee upon  a  negotiable  instrument,  they  are,  as  among  them- 
selves, presumptively  liable  in  the  order  in  which  they  indorse ; 
but  it  may  be  shown  by  proof  that  they  agreed  otherwise. 

Examples  :  3.  A  note  made  by  X  payable  to  A  is  indorsed  A,  B,  C,  D, 
and  is  in  the  hands  of  E.  E  presents  the  note  at  maturity  to  X,  who  refuses 
payment,  and  E  notifies  each  indorser.  E  may  sue  any  one  of  them.  Sup- 
pose he  recovers  from  C.  C  may  then  recover  from  either  A  or  B,  but  not 
from  D,  because  had  D  paid  he  could  have  recovered  from  the  prior  indors- 
ee of  whom  C  is  one.  If  C  recovers  from  B,  B  may  then  recover  from  A. 
The  only  recourse  of  A  is  against  X,  the  maker. 

4.  If  A,  B,  C,  and  D  are  shown  by  proof  to  have  agreed  to  become  joint 
indorsers,  then  if  C  paid  E,  C  could  recover  one  fourth  of  the  payment 
against  A,  B,  and  D  respectively. 

4.  Irregular  indorser.  An  irregular  indorser  is  one  who 
indorses  before  the  payee,  and  generally  to  lend  his  credit  to 


§  no]  DRAWER'S  AND  INDORSER'S  CONTRACT  197 

the  maker,  although  it  may  be  to  lend  his  credit  to  the  payee. 
If  an  instrument  is  made  by  X  payable  to  the  order  of  A.  B., 
we  expect  to  see  A.B.'s  indorsement  first  in  the  list ;  if  we  find 
E.  F.'s  first,  we  call  E.  F.  an  irregular  indorser.  Under  the 
NegDtiable  Instruments  Law  the  rule  is  that  if  E.F.  indorses 
in  blank  before  delivery  to  A.  B.  he  is  liable  to  A.  B.  as 
indorser ;  but  if  he  indorses  to  accommodate  A.  B.  he  is  not 
liable  to  A.  B.  although  he  is  to  subsequent  holders.  Some 
states  hold  E.  F.  a  co-maker,  and  some  hold  him  a  guarantor 
for  the  maker  ;  but  the  prevailing  rule  is  that  stated. 

5.  Accommodation  indorser.  An  accommodation  indorser  is 
one  who  indorses  in  order  to  lend  his  credit  to  another  party 
to  the  instrument.  The  simplest  case  is  where  C.  D.  wishes  to 
borrow  money  at  a  bank  and  asks  A.  B.  to  lend  his  credit.  In 
such  case  C.  D.  makes  a  promissory  note  payable  to  A.  B.'s 
order,  A.B.  indorses  it  in  blank,  and  C.  D.  discounts  it  at  the 
bank.  Had  A.  B.  been  the  ordinary  payee,  he  would  have  owned 
the  note  and  discounted  it  himself.  Suppose  A.  B.  had  owned 
it  but  the  bank  would  not  discount  it  on  A.  B.'s  and  C.  D.'s 
credit.  A.B.  asks  E.  F.  to  lend  his  credit.  A.B.  indorses  the 
note  in  blank,  E.  F.  then  indorses  it  in  blank,  and  A.  B.  dis- 
counts. E.F.  is  the  accommodation  indorser  for  A.  B.,  the 
payee.  If  E.  F.'s  signature  appears  before  that  of  A.  B.,  he  is 
called  an  "  irregular  indorser." 

6.  Guarantor.  A  guarantor  is  one  who  writes  a  guaranty 
upon  the  back  of  a  negotiable  instrument  instead  of  an  ordi- 
nary indorsement.  His  contract  is  to  pay  if  the  maker  or  other 
prior  party  does  not,  without  any  condition  as  to  presentment 
or  notice.  There  has  been  some  question  whether  such  a  guar- 
anty is  negotiable,  that  is,  whether  it  will  pass  to  new  holders 
upon  the  negotiation  of  the  paper.  It  is  generally  held  not  to 
be  negotiable,  but  when  a  negotiable  instrument  with  a  general 
guaranty  written  upon  it  is  negotiated  there  is  also  an  implied 
assignment  of  the  guaranty  to  the  new  holder. 

Example  5.  X  makes  a  negotiable  note  payable  to  the  order  of  A.  B., 
who  writes  upon  the  back,  "  For  value  received,  I  hereby  guaranty  the  pay- 
ment of  the  within  note.    A.  B.,"  and  delivers  the  note  to  C.  D.    The  latter 


I98  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

indorses  it,  "Pay  to  E.F.  CD,"  and  delivers  it  to  E.  F.  At  maturity 
E.F.  presents  it  to  X,  who  refuses  payment.  No  notice  is  given  to  A.B. 
Held:  (in  some  jurisdictions)  that  the  guaranty  passed  by  implied  assign- 
ment with  the  negotiation  of  the  note  to  E.  F.,  and  E.  F.  may  recover  upon  it 
as  assignee  of  C.  D.,  and  no  notice  to  A.  B.  is  necessary.  Other  jurisdictions 
hold  that  the  guaranty  was  to  CD.  and  did  not  pass  to  E.  F.  upon  negotia- 
tion. The  better  way  for  CD.  is  to  take  an  indorsement  by  A.B.  and  avoid 
these  questions.  If  CD.  wishes  to  escape  the  risks  of  presentment  and 
notice,  he  should  have  A.B.  indorse  "waiving  protest." 

111.  Presentment  for  payment.  The  first  condition  in  the 
drawer's  and  the  indorser's  contract  is  that  there  shall  be  due 
presentment  upon  the  maker  or  acceptor  for  payment.  Unless 
this  condition  is  met  the  drawer  or  indorser  will  be  discharged 
from  all  liability,  except  in  case  he  waives  the  condition  or 
some  allowable  excuse  be  shown  for  not  fulfilling  it.  We  have 
therefore  to  consider  how  and  when  presentment  is  to  be  made 
in  order  to  fulfill  this  condition. 

i.  Time  of  presentment.  If  the  instrument  is  payable  at  a 
fixed  time,  presentment  must  be  made  on  the  day  fixed.1  If 
this  falls  on  Sunday  or  a  holiday,  the  instrument  is  payable 
on  the  next  succeeding  business  day.  If  the  due  day  falls  on 
Saturday,  the  Negotiable  Instruments  Law  provides  that  the 
instrument  is  to  be  presented  the  next  Monday  unless  that  is 
a  holiday. 

If  the  instrument  is  payable  on  demand,  presentment  must 
be  made  within  a  reasonable  time  after  its  issue  or,  in  case  of 
bills  (not  checks),  a  reasonable  time  after  the  last  negotiation. 
Demand  instruments  may  be  presented  on  Saturday  up  to 
twelve  o'clock  noon,  unless  it  happens  to  be  wholly  a  holiday. 

Presentment  must  be  at  a  reasonable  hour  on  a  business  day. 
This  ordinarily  means  business  hours,  but  presentment  at  a 
residence  at  a  later  hour  may  be  justified  by  circumstances. 

In  computing  time  a  month  is  a  calendar  month.  Thus  a  note  dated 
January  30,  due  one  month  from  date,  is  due  February  28,  or  in  leap  year, 
February  29.  If  dated  of  February  28  and  due  in  one  month,  it  would  be 
due  on  March  28.     In  computing  days  the  actual  time  is  taken.    A  note 

1  If  days  of  grace  are  allowed,  three  days  must  be  added  before  the  present- 
ment can  be  made.    We  shall  assume  that  days  of  grace  are  abolished. 


§  in]  DRAWER'S  AND  INDORSER'S  CONTRACT  199 

dated  October  13  and  due  in  ninety  clays  is  due  January  II.  If  the  due  date 
so  fixed  is  a  holiday,  the  next  business  day  is  taken  as  the  due  date.  The 
day  of  the  date  is  excluded  in  both  cases.  A  note  dated  January  1  and  due 
one  month  from  date  is  not  due  January  31  but  February  1.  A  note  dated 
January  1  and  due  thirty  days  from  date  is  due  January  31,  not  January  30. 

2.  Place  of  presentment.  Where  a  place  of  payment  is  speci- 
fied in  the  instrument,  presentment  must  be  at  that  place. 
Where  no  place  is  specified  the  place  of  business  of  the  maker 
or  acceptor  is  understood,  or,  failing  that,  his  residence.  If 
neither  can  be  found,  then  presentment  may  be  made  to  the 
maker  or  the  acceptor  wherever  he  may  be,  or  at  his  last 
known  place  of  business  or  residence. 

Example  1.  A  note  is  made  "payable  at  the  X  Bank."  Presentment 
must  be  made  at  the  bank.  Presentment  at  the  maker's  place  of  business 
would  be  ineffective.  The  note  is  equivalent  to  an  order  by  the  maker  to 
the  bank  to  pay  the  same  and  charge  against  his  deposit.  If  the  note  is 
deposited  in  the  bank  by  the  holder  and  is  there  on  the  day  of  maturity, 
presentment  is  complete. 

3.  Mode  of  presentment.  The  instrument  must  be  exhibited 
to  the  maker  or  acceptor  (or  drawee)  and  payment  demanded  ; 
if  it  is  paid,  it  must  be  delivered  up.  If  it  is  secured  by  collateral, 
this  also  must  be  delivered  up. 

4.  To  whom  presented.  Presentment  of  a  note  is  made  to  the 
maker  or,  if  he  is  absent  from  the  place  or  inaccessible,  to  any 
person  found  in  charge  of  his  place  of  business.  Presentment  of  a 
bill  is  made  to  the  drawee  for  acceptance  or  to  the  acceptor  for 
payment  in  the  same  way.  If  the  maker  or  acceptor  is  dead, 
presentment  may  be  made  to  his  personal  representative  (execu- 
tor or  administrator).  If  an  instrument  is  made  by  partners, 
presentment  to  one  is  sufficient ;  but  if  made  by  joint  parties 
who  are  not  partners,  presentment  must  be  to  all  of  them  before 
the  instrument  can  be  deemed  to  be  dishonored. 

5.  Excuse  for  delay.  If  circumstances  beyond  the  control  of 
the  holder  cause  a  delay  in  presentment  beyond  the  day  of 
maturity,  this  delay  will  be  excused  if  presentment  is  made 
with  reasonable  diligence  after  the  cause  of  delay  ceases  to 
operate. 


200  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

Example  2.  H  in  New  York  holds  a  note  of  M  payable  in  Chicago. 
He  forwards  it  by  mail  in  due  season  to  his  agent  in  Chicago.  The  mail 
train  is  wrecked  and  the  mail  is  delayed  until  the  day  of  maturity  is  past. 
The  note  arrives  in  Chicago  two  days  after  maturity  and  is  promptly  pre- 
sented.   The  presentment  is  sufficient,  as  the  delay  is  excused. 

6.  Presentment  dispensed  with.  If  after  due  diligence  the 
holder  cannot  make  any  presentment  upon  the  maker  or 
acceptor,  presentment  is  dispensed  with.  Such  would  be  the 
case  if  the  maker  could  not  be  found  in  any  place  of  business 
or  residence.  Due  diligence  requires  that  the  holder  should 
make  proper  inquiries  as  to  the  residence  of  the  maker. 

7.  Waiver  of  presentment.  The  indorser  may  waive  present- 
ment. This  is  often  done  by  writing  above  his  indorsement 
the  words  "waiving  presentment"  or  "waiving  protest."  But 
the  waiver  may  be  oral  and  may  be  made  at  any  time.  A  prom- 
ise to  pay  after  he  is  discharged  for  nonpresentment,  if  made 
with  knowledge  of  the  fact,  will  constitute  a  waiver. 

8.  Effect  of  dishonor.  If  the  instrument  after  presentment 
to  the  maker  or  acceptor  (or  drawee)  is  dishonored  by  non- 
payment (or  nonacceptance),  the  first  condition  in  the  drawer's 
or  indorser's  contract  has  been  fulfilled.  It  then  remains  for 
the  holder  to  take  the  next  step  and  give  due  notice  of  the  fact 
and,  in  case  of  a  foreign  bill,  have  due  protest  made. 

9.  Payment  for  honor.  Where  a  bill  has  been  protested  for 
nonpayment,  any  person  may  intervene  and  pay  it  supra  protest 
for  the  honor  of  any  person  liable  thereon.  This  must  be 
attested  by  a  notarial  act  of  honor  founded  upon  the  declara- 
tion of  the  payer  as  to  his  intention  to  pay  the  bill  for  the 
honor  of  the  person  specified.  The  payer  then  pays  the  holder 
and  takes  the  bill.  All  parties  subsequent  to  the  one  for  whose 
honor  he  paid  are  discharged,  but  that  person  and  all  prior 
persons  are  liable  to  the  payer  for  honor. 

112.  Notice  of  dishonor.  The  second  condition  in  the  drawer's 
or  indorser's  contract  is  that  due  notice  shall  be  given  him  that 
the  primary  party  has  dishonored  the  instrument  by  refusing 
to  pay  it  or  it  may  be  in  the  case  of  a  bill  by  refusing  to  accept 
it.    Failure  to  give  such  notice  will  discharge  the  drawer  or 


§U2]  DRAWER'S  AND  INUORSER'S  CONTRACT  201 

indorser  unless  he  has  waived  notice  or  unless  some  allowable 
excuse  is  shown  for  not  giving  it.  We  must  therefore  consider 
what  constitutes  due  notice. 

1.  By  zvliom  given.  The  holder  may  give  the  notice,  or  his 
agent  may  give  it,  or  a  notary  employed  by  him  may  give  it. 
A  notary  is  employed  to  present  the  instrument  whenever  it  is 
intended  to  protest  it,  and  the  notary  may  give  the  required 
notice  also. 

In  addition,  any  party  who  by  getting  notice  is  himself  liable 
to  the  holder  may  give  notice  to  a  prior  party  who  would  be 
liable  to  him. 

Example  1 .  X  is  the  maker ;  A,  B,  C,  D  are  indorsers  ;  and  H  is  holder, 
of  a  note.  H  presents  the  note  to  X,  who  refuses  payment.  H  gives  notice 
of  dishonor  to  C  ;  C  gives  notice  of  dishonor  to  B ;  and  B  gives  notice 
to  A.  The  liability  of  A,  B,  and  C  is  fixed.  But  C  could  not  give  notice  to 
D,  because  if  C  paid  H,  C  could  not  recover  from  D.  The  notice  by  each 
indorser  to  his  prior  indorser  inures  to  the  benefit  of  the  holder,  who  could 
sue  A  or  B  or  C,  as  he  might  choose.  Of  course  H  might  have  given 
notice  to  all  four  had  he  wished.  The  holder  may  choose  which  of  the 
indorsers  he  will  give  notice  to  ;  each  indorser  so  notified  should  make  sure 
that  his  prior  indorsers  have  also  been  notified,  or  should  notify  them  himself. 

2.  Form.  The  notice  may  be  written  or  oral.  It  is  sufficient 
if  it  identifies  the  instrument  and  indicates  that  it  has  been 
dishonored  by  nonacceptance  or  nonpayment.  The  notice 
may  be  delivered  personally  or  it  may  be  sent  by  mail.  When 
notice  of  dishonor  is  in  due  time  properly  addressed  and 
stamped  and  deposited  in  the  post  office  or  regular  letter  box, 
the  sender  is  deemed  to  have  given  due  notice,  notwithstanding 
any  miscarriage  in  the  mails. 

3.  Time  allowed.  If  the  person  giving  and  the  person  receiv- 
ing the  notice  reside  in  the  same  place,  personal  notice  must 
be  given  at  a  reasonable  hour  of  the  day  of  dishonor  or  of  the 
day  following,  and  a  notice  by  mail  must  be  deposited  in  the 
post  office  in  time  to  reach  the  addressee  in  the  usual  course 
not  later  than  the  day  following. 

If  the  person  giving  and  the  person  receiving  the  notice 
reside  in  different  places,  the  notice  should  be  deposited  in  the 


202  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

post  office  in  time  to  go  out  by  a  mail  not  later  than  the  day 
following  the  day  of  dishonor,  or  if  there  be  no  mail  at  a  con- 
venient hour  of  that  day,  by  the  next  mail  thereafter.  Notice 
in  this  case  might  also  be  personal,  but  it  must  be  so  given  as 
to  reach  the  drawer  or  indorser  as  soon  as  if  sent  by  mail. 

Where  the  holder  gives  notice  to  an  indorser,  the  indorser 
has,  after  receipt  of  such  notice,  the  same  time  for  giving  notice 
to  a  prior  indorser. 

Example  i.  The  holder,  H,  resides  in  New  York ;  the  third  indorser,  C, 
resides  in  Chicago  ;  the  second  indorser,  B,  in  San  Francisco;  the  first 
indorser,  A,  in  New  York.  H  on  April  i  presents  the  note  and  it  is  dis- 
honored ;  on  April  2  H  mails  notice  to  C  which  is  received  by  him  in 
Chicago  on  April  4;  on  April  5  C  mails  notice  to  B  which  is  received 
by  him  in  San  Francisco  on  April  9;  on  April  10  B  mails  notice  to  A 
which  is  received  by  him  in  New  York  on  April  16.  Each  notice  is  duly 
given  and  the  liability  of  all  indorsers  is  fixed.  If  H  had  notified  A,  the 
notice  would  have  been  received  by  A  on  April  2. 

4.  Place.  If  the  drawer  or  indorser  has  added  an  address  to 
his  signature,  notice  of  dishonor  must  be  sent  to  that  address. 
If  he  has  not  added  an  address,  then  notice  must  be  sent  either 
to  the  post  office  where  he  is  accustomed  to  receive  his  letters 
or  to  the  post  office  nearest  to  his  place  of  residence.  If  he 
lives  in  one  place  and  has  a  place  of  business  in  another,  notice 
may  be  sent  to  either  place.  If  he  is  sojourning  in  another 
place,  notice  may  be  sent  to  that  place.  If  notice  is  actually 
received  within  the  time  allowed,  it  will  be  good,  though  it 
may  have  been  sent  to  the  wrong  place. 

Examples :  3.  The  indorser  lives  in  Boston  but  is  a  senator  and  sojourn- 
ing at  Washington.  Notice  may  be  sent  either  to  Boston  or  to  Washington. 
A  mere  temporary,  indefinite  visit  may  not  amount  to  sojourning. 

4.  The  indorser  lives  in  Montclair,  N.J.,  and  has  a  place  of  business  in 
New  York  City.    Notice  may  be  sent  to  either  place. 

5.  The  indorser  has  a  city  residence  in  New  York  City  and  a  summer 
residence  at  Stockbridge,  Mass.  Notice  should  ordinarily  be  sent  to  New 
York  City,  but  may  be  sent  to  Stockbridge  if  the  indorser  is  sojourning  there. 

5.  Waiver  of  notice.  Notice  may  be  waived  by  drawer  or 
indorser.  It  may  be  waived  orally  or  in  writing,  and  either 
before  or  after  the  time  for  it  has  arrived.    The  usual  method 


§ii2]  DRAWER'S  AND  INDORSER'S  CONTRACT  203 

is  to  write  "waiving  notice"  or  "waiving  protest"  above  the 
indorsement.  The  phrase  "waiving  protest"  is  construed  to 
coverall  steps,  — presentment,  notice,  and  protest,  —  but  "  waiv- 
ing notice "  does  not  dispense  with  presentment  or  protest. 
The  indorsement  "waiving  protest"  makes  the  indorser  essen- 
tially a  guarantor. 

6.  When  notice  is  excused.  Notice  is  excused  when  after  the 
exercise  of  due  diligence  it  cannot  be  given  or  when  in  the 
case  of  notice  by  mail  it  does  not  reach  the  addressee.  Due 
diligence  requires  that  suitable  inquiries  should  be  made  to 
ascertain  the  indorser's  address.  Merely  looking  in  a  directory 
is  not  enough.  Notice  need  not  be  given  to  a  drawer  who  has 
no  right  to  expect  that  the  drawee  would  accept  or  pay  the 
bill,  as  where  he  draws  upon  one  who  has  no  funds  of  his  and 
has  made  no  agreement,  express  or  implied,  to  honor  his  bills. 
Notice  need  not  be  given  to  an  indorser  for  whose  accommoda- 
tion the  instrument  was  made  or  accepted. 

Example  6.  A  promissory  note  is  made  by  X  payable  to  the  order  of  B 
and  is  indorsed  by  B  and  discounted  by  B.  X  signed  the  note  as  accommo- 
dation to  B  merely,  that  is,  loaned  B  his  credit  to  raise  money.  In  such  a 
case  B  is  not  entitled  to  notice  of  nonpayment  because  it  is  B's  duty  to  pro- 
vide for  payment,  and  not  X's. 

7.  Effect  of  failure  to  give  notice.  If  a  bill  be  presented  for 
acceptance  and  acceptance  is  refused,  a  failure  to  give  the 
drawer  and  indorsers  (if  any)  notice  of  this  fact  will  discharge 
the  drawer  and  indorsers  as  to  this  holder.  The  bill,  however, 
is  not  yet  clue,  and  it  is  therefore  possible  for  the  holder  to 
negotiate  it  to  a  holder  in  due  course  who  does  not  know  that 
it  has  been  dishonored  ;  as  to  such  a  holder  the  drawer  and 
indorsers  are  not  discharged. 

If  a  bill  or  note  is  presented  for  payment  and  is  dishonored, 
the  failure  to  give  notice  will  discharge  the  drawer  or  indorsers 
as  to  this  holder  and  all  subsequent  holders,  because  as  the  bill 
or  note  is  now  due  there  can  be  no  negotiation  to  a  holder  in 
due  course,  unless,  indeed,  it  be  at  a  later  hour  on  the  same 
day  of  maturity. 


204  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

If  a  bill  has  been  dishonored  by  nonacceptance  and  due 
notice  given,  and  it  is  afterwards  presented  for  payment  and 
dishonored,  no  further  notice  need  be  given,  unless  in  case  the 
bill  was  in  the  meantime  accepted. 

If  a  bill  has  been  dishonored  by  nonacceptance  and  no  notice 
given,  and  it  is  afterwards  negotiated  to  a  holder  in  due  course, 
the  latter  must  present  it  for  acceptance  or  payment  and  upon 
dishonor  give  due  notice. 

113.  Protest.  Protest  is  a  solemn  declaration  by  a  notary  in 
behalf  of  the  holder  against  any  loss  to  be  sustained  by  the 
holder  in  consequence  of  the  nonacceptance  or  nonpayment  of 
a  bill  or  note.  The  word  "  protest "  signifies  "  to  testify  before," 
and  a  protest  is  therefore  testimony  before  or  in  the  presence 
of  the  notary  that  the  instrument  has  been  presented,  demand 
for  acceptance  or  payment  made,  such  demand  refused,  and  the 
instrument  dishonored,  followed  by  a  formal  declaration  or  "  pro- 
test "  that  any  loss  arising  therefrom  shall  be  borne  by  the  drawer 
or  indorsers  and  not  by  the  holder.  In  practice  the  notary  must 
himself  make  the  presentment  and  demand  in  order  that  he 
may  have  this  evidence  of  dishonor;  he  cannot,  unless  statutes 
so  provide,  take  the  word  of  the  holder  or  any  other  person  as 
to  these  facts,  or  protest  an  instrument  on  hearsay  evidence. 
In  case  a  notary  cannot  be  found  to  make  such  protest,  it  may 
be  made  by  any  respectable  citizen  of  the  place  where  the  dis- 
honor occurs,  in  the  presence  of  two  or  more  credible  witnesses. 

Protest  musthe,  made  in  the  case  of  foreign  bills  of  exchange, 
for  in  such  cases  the  notary's  certificate  is  the  only  admissible 
evidence  of  presentment,  demand,  and  dishonor.  Protest  may 
be  made  in  the  case  of  other  negotiable  instruments  and  the 
notary's  certificate  used  as  evidence,  but  protest  is  not  neces- 
sary, and  the  fact  of  dishonor  may  be  proved  by  the  oral  evi- 
dence of  the  person  making  presentment  and  demand.  It  is 
now  usual  to  protest  all  negotiable  instruments,  particularly 
those  payable  at  a  bank.  In  most  banks  some  clerk  is  a  notary, 
and  if  at  the  close  of  business  hours  his  examination  of  the 
books  shows  that  the  maker  of  the  instrument  has  not  funds 
there  to  pay  it,  he  protests  the  instrument. 


§n3]  DRAWER'S  AND  INDORSER'S  CONTRACT  205 

The  notary  also  usually  gives  the  necessary  notice  of  dis- 
honor to  the  drawer  or  indorsers,  but  this  may  be  done  by  the 
holder  or  by  any  other  agent  of  his.  If  the  notary  gives  such 
notices,  he  may  include  a  statement  to  that  effect  in  his  certifi- 
cate. Practice  in  that  respect  varies.  If  the  statement  that 
notices  have  been  duly  given  is  not  included  in  the  certificate, 
that  fact  would  have  to  be  proved  at  a  trial  by  the  oral  evidence 
of  the  notary  or  other  person  who  gave  them. 

Certificate  of  Protest 


IflUtiteb  States  of  Hmedca, ) 

>  80. 

State  of  mew  jporft  ) 

BE  IT  KNOWN,  That  on  the. AJiXi. day  of.^.0LfeJL. 

in  the  year  of  our  Lord,  One  Thousand  Nine  hundred  -jrVVt/ _ ,  at  the  request  of 

First  National  Bank  of  Ithaca,  N.  Y.,  I,  BENJAMIN  L.JOHNSON,  Notary  Public  duly  Com- 
missioned and  Sworn,  dwelling  in  the  City  of  ITHACA,  County  of  Tompkins,  and  State  aforesaid,  did 
present  the  original 2W£%L _ of. %m*JO%dL  TiLoJi^oZv^/  for 

hereunto  annexed,  at  the  .„.VA**itZ  7Wr".  U1R,  —  ^tt^OO-' .where  the  same  is  payable, 

and  demanded     -^O^Arr^Jl^iZ ...,  which  was  refused. 

WHEREUPON,  /,  the  said  Notary,  at  the  request  aforesaid,  did  protest,  and  by   these  presents 

do  publicly  and  solemnly  protest,  as  well  against  the  Maker  and  Endorser  of  the  said  .ysJrtjL 

■  imiini as  against  allothers  whom  it  doth  or  may  concern,  for  exchange  or  re- 
exchange,  and  all  costs,  charges,  damages  and  interest,  already  incurred,  and  to  be  incurred  for  want  of 
-^M^Qf^AnrX ,. of  the  same. 

And  I,  the  said  Notary,  do  hereby  certify,  thai  on  the  same  day  and  year  above  written,   due 
notices  of  the  foregoing  Protest,  were  put  into  the  Post    Office  at  Ithaca,  postage  paid,  or  served  as 
follows  : 
Noiic^.<^M^l}^U^y^^rvJ  _    di,ected     _    fXwA*^   %    ^v. 

io.rh^J^  U&^t**^  do     -jqM^'m-.,  (&^MoAt% 

do  „Jk^.  i-A^vc^,... „       _     do (f  laidUL.M;f  &&«<^'tyu. 

Each  of  the  above  named  places  being  the  reputed  place  of  residence  of  the  person   to  whom   the 
fiolice  was  directed. 

IN  WITNESS  WHEREOF,  /  have  hereunto  subscribed  my  name  and 
/  \  affixed  my  Seal  of  Office. 


}  W/  \ 


C1W^....X/.  Wv~*k>v/. 


Notary  Public. 


206  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

When  protest  has  been  made  the  notary  prepares  a  certificate 
under  his  hand  and  seal  setting  forth  (a)  the  time  and  place 
of  presentment ;  (b)  the  fact  that  presentment  was  made  and 
the  manner  thereof ;  (c)  the  demand  made  and  the  answer 
given,  or  the  fact  that  the  drawee,  acceptor,  or  maker  could 
not  be  found  ;  (d)  the  cause  or  reason  for  protesting  the  instru- 
ment. This  certificate  is  annexed  to  the  instrument  protested 
or  a  copy  thereof,  and  is  handed  to  the  holder  of  the  instrument 
as  his  evidence  of  presentment,  demand,  and  dishonor.  It  may 
also,  of  course,  contain  evidence  that  notices  were  duly  sent  to 
the  drawer  or  indorsers. 

Protested  Promissory  Note 


&tme/y(>to?e^s^'  f\£**~*£»£.    /^^>  Ut^-<A-w- 


/rii 


fi^*~~ 


I^LM-eC. 


FIRST  NATIONAL  BANK.  ITHACA, N.Y. 

Ib&eJ&ececve&t'  ^hrr^*j2*s£.  ^2L^*~r&~<^ 


■^S-fi-r.  f. 


v- 


The  protest  must  be  at  the  place  where  the  instrument  is 
dishonored  and  on  the  day  of  the  dishonor.  But  it  is  not  essen- 
tial that  the  certificate  should  be  made  on  that  day.  Protest 
itself  may  be  sufficiently  indicated  by  a  "noting"  on  the  bill 
or  note  in  very  brief  form,  thus  :  "  Payment  demanded  and 
refused,  27  April,  1905.  B.L.J.  Fees  75/."  This  means  that 
on  that  date  the  notary  whose  initials  are  written  made  due 
presentment  and  demand,  that  the  instrument  was  dishonored 
and  protested,  and  that  the  notary's  charges  are  75  cents.  The 
notary  may  at  any  subsequent  date  "extend"  the  protest  by 
making  out  his  formal  certificate. 

The  costs  of  protest  are  added  to  the  amount  to  be  paid  by  any 
party  liable  on  the  instrument.  These  fees  are  fixed  by  statute 
and  include  so  much  for  protest  and  so  much  for  each  notice  of 


§nj]  DRAWER'S  AND  INDORSER'S  CONTRACT  207 

Notice  of  Dishonor 


Ithaca 


,  N.  Y &M/.:..#7 1905" 


SIR- 
TAKE  NOTICE,  that  a .TVoAsL 

y»^?Mr/. bj.^yyy^cL  T^c^c^^s/ 

For  $S^0-0.=^=- 

Dated.  ..%C^r^,...^7y..!(jPS^ 

Payable., ...^*^JUr....?>^^vfc^ after  date, 

at MiJL..  VA*AAr...  National  Bank,  of  Ithaca, 

and  endorsed  by  you,  was  this  day  Protested  for  non-payment 
and  that  the  holders  look  to  you  for  the  payment  thereof,  payment 
having  been  demanded  and  refused. 

Yours  respectfully, 


(B^w/r  X,    VLvyCX^^ 


Notary  Public. 


To 


^i(oA>0&L  jkjSSLic^v^^r^J . 


dishonor.  There  is  also  added  interest  from  the  time  the  instru- 
ment was  due  until  the  drawer  or  prior  party  pays  it  to  the  holder. 
In  case  of  a  foreign  bill  the  holder  may  recover  the  cost  of 
reexchange.  This  is  measured  by  the  sum  for  which  a  sight 
draft  must  be  drawn  on  the  drawer  of  the  dishonored  bill  in 
order  to  realize  immediately  the  amount  of  the  dishonored  bill 
plus  the  cost  of  protest. 


2o8  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

Example.  D  in  London  draws  a  bill  for  $1000  on  E  in  New  York  and 
it  is  transferred  to  H  in  New  York,  who  presents  it  for  payment.  It  is  dis- 
honored and  the  protest  fees  amount  to  $1.25.  It  is  obvious  that  D  now 
owes  H  on  that  day  $1001.25.  H  may  draw  a  sight  draft  on  D  for  such 
a  sum  as  at  the  ruling  rate  of  exchange  between  New  York  and  London 
will  realize  in  New  York  $1001.25.  The  difference  between  that  sum  (say 
$1081.35  American  money)  and  the  sum  realized  ($1001.25)  is  the  cost  of 
reexchange  which  must  be  borne  by  D. 

In  the  United  States  the  matter  of  reexchange  has  been  sim- 
plified by  statutes  which  fix  a  definite  percentage  on  a  foreign 
bill  to  be  recovered  in  lieu  of  reexchange.  This  varies  in  differ- 
ent states,  but  the  amount  is  from  10  per  cent  upward. 

114.  Checks.  The  contract  of  the  drawer  of  a  check  is  differ- 
ent from  that  of  the  drawer  of  an  ordinary  bill  of  exchange  so 
far  as  concerns  presentment  and  acceptance. 

1.  Presentment.  A  check  must  be  presented  for  payment 
within  a  reasonable  time  after  its  issue,  or  the  drawer  will  be 
discharged  from  liability  thereon  to  the  extent  of  the  loss  caused 
by  the  delay.  If  he  is  not  damaged  at  all,  he  will  not  be  discharged, 
no  matter  how  long  the  delay. 

Example.  B  draws  a  check  for  $100  and  delivers  it  to  C,  who  keeps  it  six 
months.  In  the  meantime  the  bank  fails.  When  it  failed  B  had  more  than 
$100  on  deposit.  The  bank  pays  40%  to  depositors.  C  may  recover  from 
B  $40  on  the  check,  but  not  the  other  $60  because  B  is  damaged  by  C's 
delay  to  that  extent.  Had  this  been  a  bill  of  exchange  payable  on  demand, 
B  would  have  been  discharged  altogether  by  C's  unreasonable  delay. 

A  reasonable  time  for  the  presentment  of  a  check  is  much 
shorter  than  that  for  the  presentment  of  a  bill  and  cannot  be 
prolonged  by  negotiation.  If  the  holder  and  the  bank  are  in  the 
same  place,  the  check  should  be  presented  before  the  close  of 
banking  hours  on  the  next  business  day  following  the  day  of 
its  issue.  If  the  holder  resides  in  a  different  place,  the  check 
should  be  started  by  a  reasonably  direct  route  to  the  place 
where  the  bank  is  located  not  later  than  the  day  following  its 
delivery.  The  sending  of  checks  by  indirect  routes  through 
various  correspondent  banks  has  been  held  in  some  states  to 
constitute  unreasonable  delay  in  presentment. 

2.  Certification.  If  the  holder  of  a  check  procures  it  to  be 
certified,  the  drawer  and  indorsers  (if  any)  are  discharged  from 


§n5]  DRAWER'S  AND  INDORSER'S  CONTRACT  209 

further  liability.  This  is  because  when  a  holder  takes  the  check 
to  the  bank  to  be  certified  he  is  entitled  to  the  money  and 
elects  to  take  the  promise  of  the  bank  in  place  of  it.  But  if 
the  drawer  procures  it  to  be  certified  before  delivery  to  the 
payee,  the  latter  takes  the  check  with  the  same  effect  as  an 
accepted  bill  of  exchange.  When  a  check  is  certified  the  bank 
immediately  charges  up  the  check  to  the  depositor's  account  so 
as  to  preserve  a  fund  from  which  to  pay  the  check. 

3.  Rights  of  holder  of  check.  A  holder  of  an  uncertified 
check  has,  ordinarily,  no  rights  against  the  bank  upon  which  it 
is  drawn,  even  though  the  drawer  has  funds  enough  there  to 
pay  it.  The  promise  of  a  bank  to  honor  the  checks  of  a  depos- 
itor runs  to  the  depositor  only,  and  the  payee  of  the  check  can- 
not sue  the  bank  any  more  than  the  payee  of  a  bill  of  exchange 
can  sue  the  drawee  before  acceptance.  The  sole  right  of  the 
payee  is  to  present  the  check  promptly  and,  in  case  it  is  dis- 
honored, give  the  drawer  due  notice,  and  thereafter  sue  the 
drawer.  In  Illinois,  Nebraska,  and  one  or  two  other  states,  a 
payee  is  permitted  to  maintain  an  action  against  the  bank  if 
the  drawer  had  funds  enough  to  meet  the  check ;  the  theory  in 
those  states  is  that  drawing  a  check  is  an  assignment  to  the 
payee  of  the  sum  named. 

4.  Rights  of  drawer  against  bank.  If  a  bank  wrongfully  dis- 
honors a  depositor's  check,  the  depositor  has  an  action  against 
the  bank  for  the  injury  to  his  credit.  If  he  is  a  business  man, 
the  damage  to  credit  is  presumed  to  follow  such  dishonor,  and 
he  may  recover  a  substantial  sum  in  the  discretion  of  the  jury. 

115.  Position  of  indorser  after  liability  is  fixed.  After  the 
necessary  steps  have  been  taken  to  fix  an  indorser's  liability  — 
or  without  such  steps  if  he  has  waived  them  —  the  indorser's 
position  is  essentially  that  of  a  guarantor.  His  rights  and 
remedies  are  those  already  discussed  under  the  head  of  Guar- 
anty (see  sees.  91-93  ante). 

If  an  indorser  pays  an  instrument  upon  which  he  is  liable,  he  is 
entitled  to  the  possession  of  the  instrument  and  may  proceed  upon 
it  against  all  prior  parties.  He  may  strike  out  his  own  and  all  sub- 
sequent indorsements,  and  again  transfer  the  paper  if  he  wishes. 


2io  NEGOTIABLE  INSTRUMENTS  [Ch.  IX] 

REVIEW  QUESTIONS  AND  PROBLEMS 

Section  94.  In  what  sense  is  a  negotiable  instrument  an  instrument  of 
credit?  In  what  sense  an  instrument  of  trade?  Illustrate  methods  of  pay- 
ment. What  are  the  principal  kinds  of  negotiable  instruments  ?  Explain  the 
use  of  a  bill  of  exchange.  Distinguish  inland  and  foreign  bills.  Is  a  check 
a  bill  of  exchange  ?  Name  different  kinds  of  promissory  notes.  Are  bills 
of  lading  and  warehouse  receipts  negotiable  ? 

95.  What  are  the  three  characteristics  of  negotiable  instruments? 
Explain  each.  Are  there  three  days  of  grace  in  your  state?  What  dis- 
tinguishes negotiation  from  assignment  ?    Illustrate. 

96.  Define  bill  of  exchange.  Name  the  parties  in  a  bill  of  exchange. 
What  is  acceptance  ?  How  is  a  bill  transferred  ?  What  is  a  bill  in  a  set  ? 
What  two  different  purposes  does  a  bill  in  a  set  serve?  Define  promissory 
note.  What  is  the  effect  of  stating  a  place  of  payment?  Is  it  necessary? 
Explain  discount.  What  is  a  certificate  of  deposit?  What  is  a  check? 
What  is  a  certified  check?  What  is  a  cashier's  check  and  what  is  it  used 
for?  What  is  a  cashier's  bill  of  exchange?  What  is  a  bond?  When  is  it 
negotiable?    What  is  a  coupon  bond? 

97.  What  is  the  Negotiable  Instruments  Law?  Where  is  it  in  force? 
What  is  its  effect  ? 

98.  State  the  five  essentials  of  a  negotiable  instrument.  How  should  a 
negotiable  instrument  be  signed  by  A.B.  who  is  agent  for  CD.  or  who  is 
treasurer  of  the  X.  Y.  corporation  ? 

Problem  i.  A  promissory  note  is  signed  "  A.  B.,  President.;  CD.,  Treas- 
urer." It  reads,  "  We  promise  to  pay,  etc."  Across  the  end  is  printed, 
"  X.  Y.  Co."  The  note  has  been  transferred  to  a  holder  in  due  course,  who 
sues  A.B.  and  CD.  personally.  They  set  up  that  it  is  the  note  of  the 
X.  Y.  Co.    Result? 

Problem  2.  "  I,  A.  B.,  promise  to  pay  to  the  order  of  CD.  one  hundred 
dollars  on  July  i."  Action  is  brought  against  A.B.  upon  a  promissory  note. 
Result  ? 

Problem  J.  A  check  on  a  savings  bank  reads:  "X.Y.  Savings  Bank. 
Pay  to  A.  B.  or  order  one  hundred  dollars  and  charge  to  my  account, 
No.  25.  CD."  Underneath  is  printed,  "The  bank  book  of  the  depositor 
must  accompany  this  order."     Is  this  negotiable? 

Problem  4.  "  I  promise  to  pay  to  the  order  of  A.  B.  one  hundred  dollars 
and  also  one  half  the  net  profits  of  the  sale  of  our  crop  of  oats.  CD." 
Is  this  negotiable? 

Problem  5.  "  I  promise  to  pay  to  the  order  of  A.B.  one  hundred  dollars 
on  July  1,  with  interest  at  6%,  or  10%  if  not  paid  at  maturity,  and  with 
costs  of  collection  if  not  paid  at  maturity.  CD."    Is  this  negotiable? 


REVIEW  QUESTIONS  AND  PROBLEMS  2  1 1 

Problem  6.  "  I  promise  to  pay  to  the  order  of  A.  B.  one  thousand  dollars 
within  one  year  after  he  is  married.   CD."    Is  this  negotiable? 

Problem  7.  "  I  promise  to  pay  to  the  order  of  A.  B.  five  hundred  dol- 
lars ninety  days  after  the  dissolution  of  the  partnership  between  him  and 
me.  CD."    Is  this  negotiable? 

Problem  8.  B's  clerk  made  out  checks  to  fictitious  persons  and  B  signed 
them  thinking  they  were  for  persons  who  had  dealings  with  his  concern. 
The  clerk  indorsed  the  fictitious  names,  obtained  the  money,  and  absconded. 
The  bank  charged  the  checks  to  B's  account.  B  claims  they  should  not  be 
charged  to  him  and  that  the  bank  should  stand  the  loss.    Which  is  right  ? 

99.  What  must  a  negotiable  instrument  not  contain?  State  the  excep- 
tions to  this  rule. 

Problem  g.  "  I  promise  to  pay  to  A.  B.  or  order  one  hundred  dollars,  or 
at  my  election  deliver  to  him  one  share  of  stock  in  the  X.  Y.  Co.  C  D."  Is 
this  negotiable  ? 

100.  Need  a  negotiable  instrument  state  the  consideration  ?  Why  ? 
What  is  the  effect  of  issuing  a  negotiable  instrument  undated?  without  a 
place  of  issue  or  payment  ?    What  is  the  effect  of  adding  a  seal  ? 

101.  When  a  note  is  issued  with  blanks  state  what  may  be  done  as  to 
filling  them.  How  if  it  is  issued  without  a  blank  but  with  a  partly  filled 
space  ? 

Problem  10.  A  note  made  by  X  and  indorsed  by  A  is  issued  June  10, 
but  without  any  date  expressed,  and  is  payable  "  one  month  after  date." 
It  is  transferred  to  B,  who  inserts  the  date  June  1  and  transfers  it  to  C 
It  is  presented  July  1,  and  on  dishonor  due  notice  is  given  to  A  and  B. 
Are  they  liable  ? 

102.  Is  delivery  necessary?  When  is  it  conclusively  presumed  ?  When 
not  ?    Illustrate. 

Problem  11.  C  D.  writes  his  name  on  a  blank  piece  of  paper  to  verify 
his  signature.  A.B.  writes  above  the  signature  a  promissory  note*  for  fifty 
dollars  payable  to  his  order,  indorses  it,  and  transfers  it  to  E.F.,  who  is  a 
bonajide  holder  for  value.    Is  C.  D.  liable  to  E.  F.  ? 

103.   What  is  negotiation?    How  is  it  accomplished?    What  is  a  blank 
indorsement?  a  special  indorsement  ?  an  unqualified  indorsement?  a  quali- 
fied indorsement?    a  restrictive  indorsement?    an  indorsement  waiving  con-  . 
ditions?     When  is  a  transfer  a  mere  assignment?  Who  is  the  "holder"? 

Problem  12.  A  note  is  payable  to  the  order  of  A.B.,  who  transfers  it  to 
E.  F.  without  any  indorsement.    What  is  the  position  of  E.F.? 

Problem  13.  A  note  payable  to  A.B.  or  order  is  indorsed,  "  Pay  to  E. F. 
for  collection.  A.  B."  E.  F.  then  indorses  it,  "  Pay  to  G.  H.  E.  F."  G.  H.  col- 
lects the  money  from  the  maker.    Whose  money  is  it? 


212  NEGOTIABLE  INSTRUMENTS  [Ch.  IX] 

P?-oblem  14.  A  note  payable  to  the  order  of  A.  B.  is  indorsed,  "  Without 
recourse.  A.B.,"  and  transferred  to  E.F.  The  maker  is  insolvent,  and  after 
due  presentment  to  the  maker  and  notice  to  A.  B.,  E.  F.  sues  A.  B.     Result  ? 

104.  Who  is  a  holder  in  due  course  ?  State  essentials.  When  is  an 
instrument  payable  on  demand  overdue  ?  What  is  bad  faith  ?  What  is 
value?  When  is  an  antecedent  debt  value  ?  What  is  notice  of  defenses  or 
defects?    State  a  case  where  a  holder  with  notice  is  a  holder  in  due  course. 

Problem  ij,  A  note  payable  to  order  of  A.B.  on  demand  is  transferred 
by  him  to  E.F.  six  months  after  it  was  first  issued.  E  .F.  sues  the  maker, 
who  sets  up  failure  of  consideration,  a  defense  good  against  A.B.  Is  it 
good  against  E.  F.  ? 

105.  What  defenses  are  not  good  against  a  holder  in  due  course  ?  What 
are  good?  Illustrate.  What  presumption  in  favor  of  a  holder?  How  is  it 
overcome,  and  what  then  must  the  holder  show  ? 

Problem  16.  CD.  in  New  York  gives  A.B.  a  note  payable  to  his  order 
for  $100  upon  A.B.'s  false  representation  that  he  has  worked  two  months 
for  CD.  upon  the  latter's  Kansas  farm.  In  fact  A.B.  has  never  worked 
for  CD.  at  all.  A.B.  at  once  indorses  the  note  for  value  to  E.F.,  who  does 
not  know  the  above  facts.    Is  C  D.  liable  to  E.F.  on  the  note? 

Problem  ij.  CD.  borrows  $100  of  A. B.,  gives  him  a  negotiable  note 
for  $100  at  6%  interest  and  also  a  bonus  of  $5.  A.B.  before  maturity  trans- 
fers the  note  to  E.F.  for  value  and  without  notice.  Is  CD.  liable  to  E.F. 
on  the  note  ? 

106.  State  the  maker's  contract.  Is  it  absolute  or  conditional?  When 
is  presentment  to  the  maker  at  maturity  necessary?    When  not? 

Problem  18.  A  note  is  payable  "  on  demand  at  the  X  Bank."  Is  it  neces- 
sary to  present  it  at  the  X  Bank  before  bringing  an  action  against  the  maker  ? 

107.  What  is  the  acceptor's  contract?  What  does  he  admit?  What  is 
a  general  acceptance?  What  is  a  qualified  acceptance?  Must  the  holder 
take  it?  'Result  of  taking  it?  Effect  of  specifying  a  place  of  payment? 
Effect  of  acceptance  on  separate  paper  ?  Must  the  holder  take  such  accept- 
ance ?    What  is  a  letter  of  credit  ?    Who  may  accept  bills  ?    State  exceptions. 

Problem  ig.  "  To  CD.:  Pay  to  order  of  A.B.  one  hundred  dollars  ten 
days  after  sight.  E.F."  A.B.  indorses  to  G.H.,  who  presents  it  to  CD. 
The  latter  writes,  "Accepted,  April  4,  1905.  CD."  G.H.  sues  CD.  The 
latter  sets  up  that  A.B.  forged  E.  F.'s  signature.  Is  this  a  good  defense 
against  G.  H.,  who  is  a  holder  in  due  course? 

Problem  20.  The  drawee  accepts  a  bill  as  follows  :  "  Payable  when  in 
funds.  CD."  The  holder  presents  it  for  payment  at  maturity  and  the 
acceptor  refuses  to  pay.  Due  notice  is  given  the  drawer.  Is  the  acceptor 
liable  to  the  holder?    Is  the  drawer? 


REVIEW  QUESTIONS  AND  PROBLEMS  213 

108.  In  what  cases  must  a  bill  be  presented  for  acceptance?  When  is 
it  optional?  Effect  if  drawee  keeps  and  refuses  to  return  the  bill?  On  what 
days  may  presentment  for  acceptance  be  made?  When  is  it  excused? 
If  drawee  refused  to  accept,  what  should  the  holder  do  ?  What  results  if  he 
does  not  take  these  steps  ?    What  results  if  the  bill  is  accepted  ? 

Problem  21.  A  bill  payable  ten  days  after  sight  is  issued  Jan.  8,  1904,  is 
indorsed  to  A  February  6,  and  is  presented  to  the  drawee  for  acceptance 
August  5.  The  drawee  refuses  to  accept.  A  protests  the  bill  and  duly 
notifies  the  drawer.    Is  the  drawer  liable  to  A  ? 

109.  What  is  the  drawer's  contract?  State  the  conditions.  Effect  of 
failure  to  fulfill   them  ? 

110.  What  is  an  indorsees  contract  as  to  payment?  What  warranties 
does  he  make?  What  is  the  order  of  the  indorsers'  liability?  Who  is  an 
irregular  indorser?  What  is  his  contract?  Who  is  an  accommodation 
indorser?    Illustrate.    Who  is  a  guarantor?     Is  the  guaranty  negotiable? 

111.  When  is  a  presentment  for  payment  made  ?  How  is  time  computed  ? 
What  if  the  due  date  falls  on  a  holiday?  on  Saturday?  When  is  an 
instrument  payable  on  demand  due?  At  what  place  must  presentment  for 
payment  be  made  ?  State  the  mode  of  presentment.  To  whom  is  present- 
ment made  ?  What  will  excuse  delay  in  presentment?  When  is  it  excused 
altogether?  What  is  waiver?  If  the  instrument  is  dishonored  what  is  the 
effect?    What  is  payment  for  honor? 

Problem  22.  A  note  falls  due  on  Saturday.  The  holder  presents  it  to 
the  maker  on  that  day.  It  is  not  paid.  The  holder  duly  notifies  the 
indorser.    Is  the  indorser  now  liable  to  the  holder? 

Problem  23.  A  note  is  payable  at  "114  South  Main  Street,  St.  Louis." 
It  is  presented  at  another  place  of  business  of  the  maker  in  St.  Louis,  and  on 
dishonor  due  notice  is  given  to  the  indorser.    Is  the  indorser's  liability  fixed  ? 

112.  By  whom  must  notice  of  dishonor  be  given?  Illustrate.  What 
should  the  notice  contain?  Must  it  be  written?  If  written,  how  may  it  be 
delivered  ?  Within  what  time  must  it  be  given  when  the  holder  and  the 
indorser  live  in  the  same  place?  when  they  live  in  different  places?  If  an 
indorser  receives  notice,  what  may  he  do  ?  To  what  place  should  notice  be 
sent?  What  is  waiver?  When  is  notice  excused?  What  is  "due  dili- 
gence "  ?  What  is  the  effect  of  failure  to  give  due  notice  ?  Suppose  a  bill 
dishonored  for  nonacceptance  and  no  notice  to  drawer  or  prior  indorser, 
are  the  drawer  and  indorser  absolutely  discharged  ? 

Problem  24.  A  note  made  by  X  is  indorsed  by  A,  B,  C,  and  D,  and  is  in 
the  hands  of  E.  E  presents  it  to  X  and  it  is  dishonored.  E  gives  due 
notice  to  D,  who  then  gives  due  notice  to  B,  and  the  latter  to  A  and  C. 
Who  are  liable  to  E  ? 


2i4  NEGOTIABLE  INSTRUMENTS  [Ch.IX] 

113.  What  is  protest?  By  whom  made?  When  is  protest  necessary ? 
When  allowable?  What  is  the  evidence  of  it?  How  must  the  certificate 
be  made  and  what  must  it  contain  ?  What  is  "  noting  "  ?  May  the  notary 
give  notice  ?    Who  pays  the  cost  of  protest  ?    What  is  reexchange  ? 

Problem  25.  New  York,  Jan.  5,  1905. 

Two  months  after  date  pay  to  the  order  of  A.B.  one  hundred  dollars. 
To  C.  D.,  Chicago.  E-  F- 


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P.  R.  now  holds  the  bill  at  maturity  (March  5,  Sunday)  for  the  owner, 
N.O.  (a)  State  exactly  what  P.  R.  should  do  as  to  presentment.  (J?)  In 
case  C.  D.  refuses  to  pay,  state  what  P.  R.  should  do  in  order  fully  to  pro- 
tect all  the  rights  of  N.O. 

114.  When  should  a  check  be  presented  ?  What  is  the  result  of  delay? 
How  should  a  check  be  sent  by  mail  for  collection?  What  is  the  effect  if 
the  holder  has  a  check  certified?  if  the  drawer  has  it  certified?  May  the 
holder  of  an  uncertified  check  sue  the  bank  ?  If  a  bank  wrongfully  dis- 
honors a  check,  has  the  drawer  any  remedy? 

Problem  26.  A  check  drawn  by  B  on  a  Bristol,  Vt,  bank  and  payable 
to  A's  order  is  mailed  to  A  at  Trumansburg,  N.Y.,  and  received  there 
August  9.  It  is  sent  the  same  day  to  an  Ithaca,  N.Y.,  bank  for  collection. 
On  August  10  the  Ithaca  bank  mails  it  to  its  correspondent  bank  in  New 
York  City,  where  it  is  received  on  the  nth.  On  the  12th  the  New  York 
bank  mails  it  to  its  correspondent  in  Burlington,  Vt.  The  13th  is  Sunday. 
The  Burlington  bank  receives  it  on  the  14th,  and  sends  it  at  once  to  Bristol, 
but  the  Bristol  bank  had  already  suspended  on  the  14th.  If  sent  direct,  the 
check  would  have  reached  Bristol  in  twenty-four  hours  after  it  was  mailed  at 
Trumansburg  or  Ithaca.  A  sues  B  on  the  check.  Is  B  liable  for  the  whole 
amount? 

115.  When  all  the  steps  have  been  taken  to  fix  an  indorsees  liability 
what  right  has  the  holder  against  him?  What  are  the  indorser's  rights  if 
he  pays? 


PART   IV 

AGENCY:    THE   CONDUCT   OF   BUSINESS 
THROUGH    REPRESENTATIVES 

CHAPTER  X 
PRINCIPAL  AND  AGENT 

116.  Agency :  its  divisions  and  problems.  Agency  is  a  term 
signifying  the  legal  relations  established  when  one  man  is  author- 
ized to  represent  and  act  for  another  and  does  so  represent 
and  act  for  another.  Most  of  the  things  that  a  man  may  do  in 
person  he  may  do  through  a  representative.  An  individual 
often  does,  and  a  corporation  necessarily  must,  employ  per- 
sons to  transact  affairs  and  perform  services  essential  to  the 
proper  conduct  of  a  business.  A  single  concern  often  has  hun- 
dreds and  even  thousands  of  such  employees.  In  an  era  of  large 
business  enterprises  like  the  present  the  subject  of  agency  is 
one  of  the  most  important  in  the  whole  range  of  business  law. 

The  acts  which  a  representative  may  perform  for  his  employer 
fall  into  two  classes  :  (i)  the  making  of  contracts  for  the 
employer;  (2)  the  doing  of  operative  or  mechanical  acts  in 
the  service  of  the  employer.  In  order  to  mark  the  distinction 
the  subject  is  divided  into  two  corresponding  heads, — the 
law  of  principal  and  agent  and  the  law  of  master  and  servant. 
In  the  first  there  are  three  persons  involved,  namely,  the  prin- 
cipal, the  agent,  and  the  third  party  with  whom  the  agent  brings 
the  principal  into  contractual  relations.  In  the  second  there 
are  normally  but  two  persons  involved,  namely,  the  master 
and  the  servant ;  but  if  in  performing  the  assigned  service  the 

215 


2I6  PRINCIPAL  AND  AGENT  [Ch.  X 

servant  causes  some  injury  to  a  third  person,  then  three  per- 
sons become  involved. 

In  either  class  the  relation  itself  is  generally  created  by  con- 
tract. The  employer  engages  to  pay  an  agreed  compensation 
and  the  employee  engages  to  perform  agreed  services ;  but  an 
employee  (agent  or  servant)  may  act  gratuitously.  So  far  as 
third  parties  are  concerned  the  important  question  is  whether 
the  agent  or  servant  was  authorized  to  act,  not  whether  he  was 
promised  compensation  for  doing  so.  If  the  agent  or  servant 
was  not  authorized,  the  principal  or  master  would  not  be  liable 
for  what  was  done  unless  the  act  was  subsequently  ratified. 
Prior  authorization  or  subsequent  ratification  is  therefore  the 
basis  of  a  principal's  or  master's  liability.  The  main  problem 
of  agency  is  to  discover  when  and  under  what  circumstances  a 
man  is  liable  for  the  acts  of  another  who  represents  him  or 
assumes  to  represent   him. 

The  problem  is  not  an  easy  one.  If  an  employer  were  liable 
only  for  the  specific  acts  which  he  expressly  authorizes  or  rati- 
fies, there  would  be  little  difficulty.  But  the  law  may  hold  a 
principal  liable  for  a  specific  contract  which  he  never  author- 
ized, or  which  he  even  forbade,  upon  the  ground  that  he  held 
his  agent  out  to  the  world  as  authorized  to  make  such  con- 
tracts ;  in  other  words,  it  estops  him  from  denying  that  an 
agent  had  the  authority  which  he  led  others  reasonably  to  sup- 
pose that  such  agent  possessed.  And  it  may  hold  a  master 
liable  for  a  specific  act  of  a  servant  which  was  unauthorized  or 
forbidden,  upon  the  ground  that  the  act  was  performed  in  the 
course  of  the  business  intrusted  to  the  servant  and  in  the  fur- 
therance of  it. 

Examples :  I.  P  authorizes  A  to  travel  and  sell  goods  for  him  as  his 
agent,  but  forbids  A  to  hire  a  horse  on  credit,  furnishing  A  with  funds 
for  the  purpose.  A  hires  a  horse  on  the  credit  of  P  while  traveling  about 
P's  business.  P  is  liable.  The  general  power  conferred  to  travel  and  sell 
goods  carries  with  it,  as  to  third  persons,  the  incidental  power  to  contract 
for  the  means  necessary  to  this  end.  This  cannot  be  limited  by  secret 
instructions  to  the  agent. 

2.  P  intrusts  A  with  goods  to  sell,  but  forbids  A  to  receive  the  payment. 
The  buyer  pays  A,  who  absconds  with  the  money.    P  cannot  recover  again 


§ii7]  APPOINTMENT  OF  AGENTS  217 

from  the  buyer.  An  agent  having  possession  of  goods  with  power  to  sell 
them  has  implied  authority  to  receive  payment.  But  if  the  agent  has  not 
possession  of  the  goods  which  he  sells  he  has  no  implied  authority  to 
receive  payment. 

3.  M  tells  S,  his  servant,  to  drive  a  load  of  goods  to  the  railway  station. 
S  drives  negligently  and  injures  C.  M  is  liable  because  S  was  about  M's 
business. 

4.  As  above.  C  is  blocking  the  road.  S  becomes  angry  and  drives  his 
wagon  into  and  injures  C's  wagon.  If  S  does  this  to  further  M's  business, 
that  is,  to  get  the  goods  sooner  to  the  station,  M  is  liable.  If  S  does  it 
solely  to  vent  his  own  spite,  M  is  not  liable.    This  is  a  question  for  the  jury. 


I.   Appointment  of  Agents 

117.  Who  may  appoint  agents.  Generally  speaking,  a  person 
competent  to  make  any  contract  is  competent  to  appoint  an 
agent  by  contract  or  ratification. 

1.  Infants.  An  infant's  contracts  are  usually  voidable  at  the 
election  of  the  infant ;  they  are  not  absolutely  void.  It  is  some- 
times said,  however,  that  his  appointment  of  an  agent  is  abso- 
lutely void  ;  but  this  rule  is  now  generally  confined  to  one 
form  of  appointment,  namely,  by  a  formal  sealed  document 
known  as  a  "  power  of  attorney."  The  decided  tendency  of  the 
courts  is  to  hold  the  appointment  of  agents  by  infants,  in  any 
other  form,  to  be  voidable  at  the  infant's  election,  like  his  other 
contracts.  Thus  an  agency  to  sell  the  infant's  horse  would  be 
voidable,  while  a  power  of  attorney  to  sell  and  convey  his  lands 
would  by  most  states  but  not  by  all  be  held  void  and  of  no 
effect.    There  seems  to  be  no  sound  reason  for  such  a  distinction. 

2.  Insane  persons.  An  insane  person's  contracts  are  voidable 
by  him'or  his  guardian  if  he  has  been  judicially  declared  to  be 
insane  or  if  the  other  party  to  the  contract  knew  him  to  be 
insane.  In  other  cases  the  contract  is  binding  if  it  has  been  so 
far  executed  that  the  other  party  to  it  cannot  be  put  in  statu 
quo.  Perhaps  a  deed  by  an  insane  person  is  absolutely  void. 
If  an  insane  person,  not  adjudged  to  be  so,  appoints  an  agent 
by  a  formal  "  power  of  attorney,"  this  may  be  void  ;  but  in  any 
other  case  the  third  person  who  contracts  with  the  agent  in 


2I8  PRINCIPAL  AND  AGENT  [Ch.  X 

good  faith,  with  no  notice  of  the  principal's  insanity,  would  be 
protected  from  loss  thereby. 

3.  Married  women.  At  common  law  a  married  woman  could 
make  no  contracts  in  person,  and  could  not  therefore  appoint 
an  agent.  But  under  the  modern  married  women's  acts,  a  mar- 
ried woman  may  generally  contract  as  freely  as  an  unmarried 
woman,  and  so  far  as  she  may  make  contracts  in  person  she 
may  appoint  agents  to  make  them  for  her. 

4.  Corporations.  Corporations  can  act  only  through  agents. 
The  directors  are  the  chief  agents,  and  they  may  appoint  such 
additional  agents  as  are  authorized  by  the  charter  or  as  are 
necessary  to  carry  out  the  objects  authorized  by  the  charter 
(see  sec.  150  post). 

5.  Unincorporated  associations.  Unincorporated  associations, 
such  as  clubs  and  other  societies,  are  not  legal  entities  like  cor- 
porations. If  they  appoint  agents,  the  members  individually 
and  collectively  are  the  principals  so  far  as  they  authorized  the 
appointment.  Such  authority  may  be  gathered  from  the  consti- 
tution and  by-laws  to  which  each  member  assents,  or  may  be 
found  in  a  specific  vote  of  a  meeting  at  which  members  were 
actually  present.  If  the  constitution  provides  that  a  majority 
vote  shall  bind  all  members,  assent  to  the  constitution  is  assent 
to  any  action  thus  taken  under  it.  An  agent  or  committee  of  a 
club  may  be  personally  liable  when  the  other  members  are  not. 

Example  1.  A  college  class  voted  to  publish  an  annual  and  elected  A 
business  manager.  A  contracted  with  C  for  the  printing.  All  the  members 
of  the  class  were  present  at  the  meeting  except  G.  All  are  liable  to  C 
except  G.  If  H  had  been  present  and  had  voted  against  the  publication, 
the  question  whether  he  was  also  liable  would  be  determined  by  a  finding 
as  to  whether  H  acquiesced  in  the  decision  of  the  majority.  » 

6.  Partnerships.  In  a  partnership  each  member  is  both  prin- 
cipal and  agent.  Each  is  liable  as  principal  for  the  acts  of  the 
other  partners  within  the  scope  of  the  partnership  business, 
and  each  by  acting  as  agent  for  the  partnership  may  bind  them. 
One  of  the  implied  powers  of  a  partner  is  to  appoint  necessary 
agents.  If  rightfully  appointed,  an  agent  may  by  his  acts  bind 
the  partnership. 


§§  uS,  119, 120]         APPOINTMENT  OF  AGENTS  219 

7.  Subagency.  A  principal,  P,  may  empower  an  agent,  A,  to 
employ  a  subagent.  If  under  such  authority  A  appoints  B  as 
subagent,  B  becomes  agent  of  P.  If  there  is  no  authority 
to  appoint  a  subagent,  the  agent  must  act  personally  in  all 
matters  involving  judgment,  skill,  or  discretion,  but  may  dele- 
gate merely  ministerial  or  mechanical  duties  to  another.  In 
such  a  case  the  subordinate  is  the  agent  not  of  the  principal 
but  of  the  agent,  and  the  latter  is  liable  to  the  principal  for  any 
default  of  the  subagent. 

118.  Who  may  be  an  agent.  Any  person  may  be  an  agent 
and  be  vested  with  authority  to  bind  his  principal.  An  infant, 
a  married  woman,  and  probably  a  lunatic  may  be  the  instru- 
mentality for  bringing  the  principal  into  contractual  relations 
with  third  parties.  If  the  principal  chooses  and  empowers  an 
agent,  he  must  be  responsible  for  the  results. 

A  principal  may  appoint  joint  agents.  Ordinarily  joint 
agents  must  act  jointly  ;  but  if  a  partnership  is  acting  as  agent 
one  partner  may  act  alone,  and  if  a  corporation  is  acting  as 
agent  a  majority  of  the  directors  may  decide  for  all. 

119.  Form  of  appointment.  Generally  an  agent  may  be 
appointed  by  parol.    To  this  there  are  two  exceptions. 

1.  The  Statute  of  Frauds  in  a  few  states  requires  that 
where  a  contract  between  P  and  C  must  be  in  writing  and 
signed  by  P  or  his  agent,  the  latter's  authority  to  sign  shall 
also  be  in  writing.  This  is  not  generally  found  in  the  statute. 
As  between  the  principal  and  agent,  a  contract  of  agency  not 
to  be  performed  within  one  year  must  be  in  writing  ;  but  if  an 
agent  acted  under  a  parol  contract  the  principal  would  as  to 
third  persons  be  bound  by  the  agent's  acts. 

2.  Where  the  contract  between  the  principal  and  a  third  per- 
son is  required  to  be  under  seal  (as  a  conveyance  of  lands),  the 
authority  of  the  agent  to  execute  the  contract  must  also  be  under 
seal.  Such  a  formal  authorization  is  commonly  called  a  "  power 
of  attorney."    A  power  of  attorney  may  be  used  in  any  case. 

120.  Ratification.  Ratification  consists  in  assenting  to  an  act 
done  in  one's  name  or  on  one's  behalf  either  by  a  person  who 
had  no  authority  to  represent  one  at  all  or  by  a  person  who 


Power  of  Attorney 


Unoto  all  0im  l)j>  tljese  presents, 


That. 


I  Thomas  Martin,  of  the  city  of  Elmira,  county  of  Chemung,  and 


state  of  New  York, 


have  made,  constituted  and  appointed,  and  by  Chrjae  presents  do  make,  con- 
stitute  and  appoint.Wal.ter  Brown,  of  the.  said  .city ;  my 

true  and  lawful  attorney    for.-rr-TT.m.e.rrTTrr-and  in.TTTTr:.m.y.T7T-7-.name,  place  and 
stead  to  Bra:n*'  bargain,  and  sell  all  such .lands,  tenements  and  heredita=_ 
ments  whatsoever,  situated  in  the state  of | _ Now '.York,  whereof  I .now  am, 
by  any  ways  or  means  howsoever,  entitled  to  or  interested  in,'  either  in 


severalty  or  jointly,  or  in  common  with  any  other  person  or  persons,  or 
any  part,  share,  or  proportion  thereof,  and  all  such  right,  title,  inter= 


est,  claim  and  demand,  both  in  law  and  in [.equity., .as  I !  may  have  in  the 
same,  for  such  sum  and  price  and  on  such  terms  as  to  him  shall  seem 


meet. 


giving  and  granting  unto ?.y said  attorney    full    power  and    authority 

to  do  and  perform  all  and  every  act  or  thing  whatsoever  requisite  and  necessary 
to  be  done  in  and  about  the  premises,  as  fully  to  all  intents  and  purposes 
as \ might  or  could  do  if  personally  present,  with  full  power  of  sub- 
stitution and  revocation,  hereby   ratifying  and  confirming  all  that my. '. 

said  attorney     or ft*8. substitute  shall  lawfully  do  or  cause  to  be  done 

by  virtue  thereof. 

*$\\  WitXlt$$  WfyCtCOf,^l^-/iave  hereunto  set— ^my--7T. 
hand  and  seal  the— — :.f A.f ^..-r-r-.day  of:— — .J.an?.a.ry.-.— -— One  thousand 
nine  hundred  and.?.^.ve..- 


3In  presence  of 

&tate  of  jnen)  gorfc, 

County  of P.*1.6!?™.?. 

City  0f Elmira 


«SEAL  » 

[i-sj 


On  this— — -.f.!.f^.TrrTrr:.day  of.Tr^r.?*™?:™.—— r.  in  the   year  One   thousand 

nine  hundred  and..f.i.ve. before  me,  the  subscriber,  personally 

appeared T^?.?ag.. Martin to  me  personally   known   to    be 

the  same  person    described  in  and  who  executed  the  foregoing  instrument,  and 
he acknowledged  to  me  that     he     executed  the  same. 


J  NOTARY '  S  "I 
I       SEAL       J 


m< 


Notary  Public   for   Chemung   County,    New  York. 
220 


[§i2o]  APPOINTMENT  OF  AGENTS  22  1 

having  some  authority  exceeded  it.  When  such  unauthorized 
act  comes  to  the  attention  of  him  in  whose  name  or  on  whose 
behalf  it  was  ostensibly  done,  he  has  an  election  to  repudiate 
it  or  to  adopt  it.  If  he  elects  to  adopt  it,  this  constitutes  ratifi- 
cation, and  he  is  in  precisely  the  same  situation  as  if  he  had 
originally  authorized  it. 

Example  I.  A,  knowing  his  friend  P  is  on  the  lookout  for  a  rare  book, 
and  seeing  one  at  a  bookshop,  buys  the  book  in  P's  name  and  upon  P's 
credit.  When  P  learns  of  this  he  tells  the  bookseller  to  send  him  the  book, 
but  later,  before  receiving  it,  countermands  the  order.  P  has  ratified  and 
cannot  afterwards  withdraw  his  assent.  P's  contract  dates  from  the  time  of 
the  sale  to  A,  not  from  the  time  of  ratification. 

I.  Essentials  of  ratification.  The  essentials  of  ratification 
are  given  below. 

(a)  The  contract  must  have  been  made  in  the  name  of  and 
in  behalf  of  an  existing  and  ascertainable  person.  If  one  con- 
tracts in  the  name  of  a  corporation  not  yet  formed,  the  corpo- 
ration when  formed  cannot  strictly  ratify,  although  its  assent 
may  amount  to  the  acceptance  of  an  offer.  So  if  A  intending 
to  act  without  authority  for  P  makes  a  contract  in  his  own 
name,   P  cannot  ratify. 

(b)  The  one  in  whose  name  the  contract  was  made  must 
assent  to  it.  Such  assent  may  be  implied  for  example  by 
accepting  benefits  under  the  contract.  Silence  alone  is  not 
assent  where  one  without  any  authority  whatever  has  assumed 
to  act  for  another,  but  where  an  agent  merely  exceeds  his 
authority  his  principal's  silence  after  full  knowledge  of  the  facts 
may  amount  to  assent.  The  assent  must  be  as  to  the  whole 
act ;  the  principal  cannot  ratify  a  part  and  disaffirm  a  part.  If 
he  takes  the  benefit  he  must  bear  the  burdens. 

Example  2.  A  without  any  authority  sold  and  delivered  to  C  a  load  of 
coal  belonging  to  P.  In  delivering  the  coal  he  negligently  broke  C's  win- 
dow. P  sent  C  a  bill  for  the  coal.  P  thereby  ratified  A's  acts  and  became 
liable  to  C  for  damages  for  the  broken  window. 

(e)  The  principal  must  be  competent.  If  he  could  have 
appointed  an  agent,  he  can  ratify  with  the  same  results  as  if 
he  had  previously  authorized  (see  sec.    117  ante). 


222  PRINCIPAL  AND  AGENT  [Ch.  X 

(d)  If  the  principal  must  adopt  a  particular  form  in  order  to 
appoint,  he  must  follow  the  same  form  in  order  to  ratify  (see 
sec.  119  ante). 

2.  Ratification  of  forgery.  If  A  forges  P's  name  to  an  instru- 
ment, as  a  promissory  note,  can  P  ratify  the  act  ?  Upon  this 
the  cases  differ.  Some  hold  that  P  may  ratify  because  he  could 
have  authorized.  Others  hold  that  P  cannot  ratify  because  A 
does  not  in  fact  assume  to  act  for  P  in  a  forgery,  and  that  P's 
only  motive  in  ratifying  would  be  to  conceal  the  crime  of  A. 
But  all  cases  agree  that  P  may  be  estopped  to  deny  the  validity 
of  the  signature  where,  after  P  acknowledges  such  validity,  the 
instrument  is  taken  by  an  innocent  holder  for  value  relying 
upon  such  acknowledgment. 

3.  Legal  effect  of  ratification.  Ratification  relates  back  to  the 
time  of  the  formation  of  the  contract  or  the  doing  of  the  act, 
and  the  principal  and  the  third  person  are  in  the  same  position 
as  if  the  agent  had  in  fact  had  full  authority  at  that  time. 

4.  Effect  of  nonratification.  If  the  principal  refuses  to  ratify, 
the  agent  is  liable  to  the  third  party  in  damages  for  a  breach 
of  his  implied  warranty  of  authority.  Every  agent  who  makes 
a  contract  in  the  name  of  another  warrants  that  he  has  author- 
ity from  that  other  to  make  it. 

121.  Agency  by  necessity.  A  wife  has  implied  authority  given 
her  by  the  law  to  pledge  her  husband's  credit  for  necessaries. 
This  exists  independent  of  the  will  of  the  husband.  But  the  one 
furnishing  the  goods  has  the  burden  of  showing  that  they  were 
in  fact  necessaries  and  that  they  were  not  otherwise  provided. 

An  infant  child  has  not,  in  England  and  in  some  of  our  states, 
any  similar  authority  to  pledge  his  father's  credit  for  neces- 
saries ;  but  some  states  give  him  such  implied  authority.  This 
is  therefore  a  disputed  question. 

An  unpaid  vendor  in  possession  of  the  goods  has  implied 
authority  to  sell  them  for  the  vendee  and  charge  the  vendee 
the  difference  between  the  contract  price  and  the  amount 
received  upon  the  resale  (see  sec.  58  ante). 

122.  Termination  of  agency.  An  agency  may  be  terminated 
in  various  ways,  some  of  which  are  as  follows. 


§  123]  APPOINTMENT  OF  AGENTS  223 

1.  By  the  parties.  The  parties  may  agree  to  terminate  it,  or, 
subject  to  the  exception  noted  in  the  next  section,  the  prin- 
cipal may  dismiss  the  agent,  or  the  agent  may  quit  the  employ- 
ment. If  either  principal  or  agent  wrongfully  terminates  the 
agency,  he  is  liable  to  the  other  party  for  breach  of  contract. 
If  the  principal  terminates  it,  he  should  notify  third  persons 
with  whom  the  agent  has  been  accustomed  to  deal,  or  he  may, 
as  to  them,  be  estopped  to  deny  the  agency  if  the  agent  makes 
further  contracts  with  them.  If  the  agent  or  servant  wrongfully 
quits  the  employment  before  the  contract  term  has  expired,  he 
cannot  in  most  states  recover  any  compensation  for  what  he  has 
already  done ;  but  a  few  states  allow  him  to  recover  the  value 
of  such  services  less  the  damages  the  principal  or  master  has 
suffered  from  the  breach. 

2.  Death.  Subject  to  the  exception  noted  in  the  next  section, 
the  death  of  either  party  terminates  the  agency.  If  after  the 
death  of  the  principal  the  agent,  though  ignorant  of  such  death, 
makes  a  contract  with  a  third  party,  also  ignorant  of  such 
death,  the  contract  binds  no  one.  The  dissolution  of  a  cor- 
poration has  the  same  effect  as  the  death  of  an  individual. 

3.  Illness  of  agent.  The  illness  of  an  agent  may  create  an 
impossibility  of  performance,  which  will  terminate  the  agency. 
The  illness  of  the  principal  would  ordinarily  have  no  effect. 

4.  Insanity.  The  insanity  of  either  party  would  terminate 
the  agency.  But  if  the  principal  becomes  insane,  a  person  who 
deals  with  the  agent  in  ignorance  of  such  insanity,  and  before 
the  principal  has  been  judicially  declared  to  be  insane,  would 
be  protected. 

5.  Impossibility.  If  the  subject-matter  of  the  agency  is 
destroyed,  the  agency  would  of  necessity  be  terminated.  If  the 
agent  is  arrested  and  imprisoned,  this,  like  illness  or  insanity, 
renders  further  performance  by  him  impossible.  If  two  agents 
are  authorized  to  do  the  same  act  and  one  accomplishes  it,  the 
agency  of  the  other  is  terminated. 

123.  Irrevocable  agencies.  The  above  rules  are  subject  to  the 
exception  that  if  an  agency  be  "  a  power  coupled  with  an 
interest,"  the  agency  is  irrevocable.     An  agent  has  a  power 


224  PRINCIPAL  AND  AGENT  [Ch.  X 

coupled  with  an  interest  when  to  his  authority  to  act  for  his 
principal  is  added  an  interest  in  the  subject-matter  of  the 
agency  itself,  as  distinguished  from  an  interest  in  the  compen- 
sation he  is  to  receive  for  his  services. 

Examples  :  I .  P  pledges  goods  to  A  for  a  debt  and  gives  A  power  to 
sell  the  goods  upon  default.  P  cannot  revoke  this  power  nor  will  it  be 
revoked  by  P's  death  or  insanity.  A  has  an  interest  in  the  subject-matter 
to  secure  his  debt. 

2.  P  sends  goods  to  A,  a  commission  merchant,  to  sell  for  him,  and 
requests  A  to  make  an  advance  of  a  specified  sum.  A  does  so.  P  cannot 
revoke  this  agency  nor  will  the  law  revoke  it.  A  has  an  interest  in  it  beyond 
the  interest  of  acting  as  agent,  because  he  is  to  reimburse  himself  to  the 
extent  of  the  advance  from  the  proceeds  of  the  sale.  But  the  interest  in 
the  compensation  alone  does  not  constitute  a  power  coupled  with  an  interest. 

II.   Obligations  of  Principal  and  Agent  to  Each  Other 

124.  Obligations  of  principal  to  agent.  The  obligations  of  the 
principal  to  the  agent  may  be  briefly  enumerated  under  the  heads 
of  compensation,  reimbursement,  and  indemnity. 

I.  Duty  to  compensate  agent.  The  principal  must  pay  to  the 
agent  the  agreed  compensation,  if  any,  or  a  reasonable  com- 
pensation where  none  has  been  agreed  upon.  If  the  principal 
ratines  an  unauthorized  act,  the  same  result  follows.  If  the 
principal  wrongfully  revokes  the  authority,  the  agent  may  sue 
for  the  breach.  His  damages  are  presumptively  the  entire 
stipulated  compensation,  but  the  principal  may  show  what  the 
agent  might  have  earned  in  a  similar  occupation  during  the 
unexpired  term  and  thus  reduce  the  damages.  An  agent  would 
not  be  justified  in  remaining  idle  after  his  discharge  if  he  could 
by  reasonable  diligence  secure  other  and  similar  employment. 
If  the  agency  is  revoked  by  impossibility,  the  agent  may  recover 
the  reasonable  value  of  the  services  actually  performed.  If  the 
agent  renounces  the  employment,  he  can  recover  no  compen- 
sation in  most  states ;  but  some  permit  him  to  recover  the 
reasonable  value  less  the  damages  sustained  by  the  principal 
from  the  breach.  An  agent  cannot  recover  compensation  for 
illegal  services,  as  lobbying,  betting,  and  the  like. 


§125]  MUTUAL  OBLIGATIONS  225 

2.  Duty  to  reimburse  agent.  The  principal  must  reimburse 
the  agent  for  all  expenses  necessarily  incurred  by  him  in  the 
discharge  of  the  agency,  unless  the  agent's  compensation  is 
intended  to  cover  these  expenses. 

3.  Indemnity.  If  an  agent  is  compelled  to  pay  damages 
because  of  his  innocently  following  his  employer's  instructions, 
he  is  entitled  to  be  indemnified. 

Example.  P  directs  A  to  sell  certain  goods.  A  does  sell  them.  C  after- 
wards claims  the  goods  were  his  and  sues  A  for  conversion  and  recovers 
from  A  their  full  value.  P  must  indemnify  A.  But  if  A  had  known  the 
goods  did  not  belong  to  P  he  could  not  recover  indemnity. 

125.  Obligations  of  agent  to  principal.  An  agent  owes  to 
his  principal  the  duties  of  obedience,  prudence,  skill,  and  good 
faith,  and  is  also  bound  to  render  accounts.  He  cannot  dele- 
gate his  duties. 

1.  Obedience.  The  agent  must  follow  his  instructions  faith- 
fully.   If  he  does  not,  and  loss  ensues,  he  must  make  it  good. 

Example  1.  P  sends  to  A  goods  to  be  sold  for  cash.  A  sells  them  to  C 
and  takes  C's  check.  The  check  is  dishonored  and  C  absconds.  A  is  liable 
to  P  for  the  loss. 

2.  Prudence  and  skill.  An  agent  is  bound  to  possess  and 
to  exercise  the  prudence,  skill,  and  diligence  necessary  to  the 
proper  conduct  of  the  business  intrusted  to  him. 

Examples :  2.  P  sends  A  money  to  loan  upon  security.  A  loans  it  upon 
worthless  securities  which  a  prudent  investor  would  not  take.  A  is  liable  to 
P  for  the  loss. 

3.  P  authorizes  A  to  effect  insurance  on  P's  property.  A  takes  a  policy 
in  a  company  which  prudent  men  believe  to  be  of  doubtful  solvency.  Loss 
ensues.    A  must  make  it  good. 

3.  Good  faith.  The  relation  is  a  fiduciary  one.  The  agent 
is  bound  to  act  with  entire  good  faith  toward  his  principal. 
He  cannot  act  for  both  his  principal  and  a  third  party.  He 
cannot  buy  his  principal's  property,  or  sell  his  own  to  his  prin- 
cipal, without  the  latter's  full  knowledge. 

Examples:  4.  P  directs  A  to  buy  a  horse.  X  directs  A  to  sell  a  horse. 
A  sells  X's  horse  to  P.  Neither  P  nor  X  is  bound.  A  cannot  act  for  both 
parties  unless  each  knows  that  his  agent  is  also  acting  for  the  other.  A  can 
recover  no  compensation. 


226  PRINCIPAL  AND  AGENT  [Ch.  X 

5.  P  directs  A  to  buy  a  horse.  A  sells  P  his  own  horse.  When  P  dis- 
covers this  he  may  rescind  the  contract.    A  cannot  be  both  buyer  and  seller. 

6.  A  works  for  P  in  the  manufacture  of  a  secret  compound.  Afterwards 
A  begins  to  manufacture  the  same  compound.  P  may  enjoin  A  from  doing 
so.  An  agent  or  servant  cannot  disclose,  or  use  for  his  own  advantage,  trade 
secrets  learned  while  in  the  employment  of  another. 

4.  Accounting.  The  agent  must  keep  and  render  accounts. 
He  must  keep  his  principal's  money  or  goods  separate  from  his 
own ;  if  he  mixes  them  and  any  loss  results,  the  agent  must 
bear  it.  He  can  make  no  secret  profits  out  of  his  principal's 
business.  He  cannot  even  keep  moneys  obtained  for  the  prin- 
cipal in  an  illegal  transaction. 

Examples:  7.  An  agent  deposits  his  principal's  money  in  a  bank  in 
his  own  name.  The  bank  fails.  The  agent  must  bear  the  loss.  Had  he 
deposited  in  his  principal's  name  (P,  by  A,  agent),  the  loss  would  have 
fallen  on  the  principal  if  the  agent  acted  prudently  in  selecting  the  bank. 

8.  P  directs  A  to  purchase  coal.  The  trade  price  is  $5  a  ton.  X  agrees 
that  if  the  agent  will  purchase  of  him  he  will  return  to  the  agent  50  cents 
on  each  ton.  A  buys  of  X  and  P  pays  X  at  the  rate  of  $5  a  ton.  X  gives 
A  50  cents  on  each  ton.    P  may  compel  A  to  account  to  him  for  this  money. 

5.  Nondelegation  of  duties.  An  agent  cannot  delegate  to 
another  the  exercise  of  any  discretion  or  judgment  unless  his 
principal  has  authorized  him  to  do  so.  He  may  delegate  the 
performance  of  merely  mechanical  duties,  like  the  writing  of 
contracts  or  other  documents,  but  of  course  is  liable  for  the 
result.  If  he  delegates  discretionary  duties  without  authority, 
he  is  liable  for  any  loss.  If  he  has  authority  to  select  sub- 
agents,  he  is  liable  only  if  he  fails  to  exercise  due  care  in 
selecting  them. 

Examples  :  9.  P  directs  A  to  sell  goods.  A  engages  B  to  sell  them  and 
turns  them  over  to  B.  A  is  liable  in  tort  for  conversion  of  the  goods  in 
delivering  them  to  B  to  sell. 

10.  P  deposits  a  check  in  the  X  bank  in  New  York  for  collection.  The 
check  is  drawn  upon  a  bank  in  Chicago  and  the  X  bank  sends  it  to  the 
Y  bank  in  Chicago  for  collection.  The  Y  bank  negligently  fails  to  present 
it  in  due  time  and  loss  ensues  to  P.  Is  the  X  bank  liable  to  P  ?  Upon  this 
courts  differ.  Some  say  P  impliedly  authorizes  the  X  bank  to  employ  a  sub- 
agent,  and  if  the  X  bank  uses  due  care  in  selecting  the  Y  bank  it  is  not 
liable.    Other  courts  say  P  contracts  with  the  X  bank  alone  and  assumes 


§126]  LIABILITY  OF  PRINCIPAL  227 

no  responsibility  for  the  acts  of  those  whom  the  X  bank  engages  to  assist 
in  the  collection.  The  real  question  is,  Had  the  X  bank  authority  from  P 
to  appoint  a  subagent  for  P? 

6.  Del  credere  agent.  A  del  credere  agent  undertakes  to 
guaranty  the  principal  against  loss  from  credits  given  by  the 
agent  to  third  persons  in  the  course  of  the  agency.  In  the 
United  States  it  is  generally  held  that  the  agent  is  liable  pri- 
marily and  not  as  a  mere  guarantor,  and  that  therefore  his 
promise  need  not  be  in  writing.  This  agency  is  pretty  close  to 
a  sale  by  the  principal  to  the  agent  and  resale  by  the  agent 
to  third  persons,  but  it  differs  in  that  the  title  to  the  goods 
remains  in  the  principal  until  they  are  sold  to  third  persons. 

7.  Gratuitous  agent.  If  an  agent  promises  to  act  gratuitously, 
the  promise  is  unenforceable.  But  if  he  does  act  he  is  bound 
to  act  with  some  care  and  prudence.  It  is  generally  said  that 
he  is  bound  to  use  slight  care  and  is  liable  only  for  gross  negli- 
gence. The  true  standard  is  the  care  that  reasonable  men  give 
under  like  circumstances.  For  example,  bank  directors  serve 
gratuitously;  a  particular  board  is  not  bound  to  use  as  much 
care  and  vigilance  as  an  individual  banker  gives  to  his  own  busi- 
ness, but  must  exercise  the  care  which  is  ordinarily  and  rea- 
sonably given  by  such  boards  as  that  is  fixed  by  usage  and 
experience  (see  sec.  63  ante). 

III.   Liability  of  Principal  to  Third  Parties 

126.  General  rules.  The  principal  is  liable  upon  all  contracts 
made  by  his  agent  within  the  scope  of  the  actual  authority 
given  to  the  agent. 

The  principal  is  also  liable  upon  all  contracts  made  by  the 
agent  within  the  scope  of  the  apparent  or  ostensible  authority 
conferred  upon  the  agent. 

The  principal  is  not  liable  upon  contracts  made  by  his  agent 
beyond  the  scope  of  the  actual  or  ostensible  authority  unless 
he  ratifies  such  contracts. 

Examples :  1.  P  authorizes  A  to  sell  goods,  but  at  not  less  than  market 
price,  and  to  responsible  parties  only.    A  sells  to  X.    P  seeks  to  escape  the 


228  PRINCIPAL  AND  AGENT  [Ch.  X 

contract  on  the  ground  that  X  is  not  a  responsible  party  and  that  A  sold  X 
the  goods  at  less  than  the  market  price.  Held:  P  is  bound  by  the  sale. 
His  instructions  to  his  agent,  not  communicated  to  X,  could  not  limit  the 
ostensible  authority  of  the  agent.  Of  course  A  is  liable  to  P  for  any  loss 
occasioned  by  his  disobedience  of  instructions. 

2.  P  authorizes  A  to  sell  goods.  A  barters  P's  goods  for  X's  horse  and 
buggy.  P  is  not  bound.  An  authority  to  sell  is  not  in  any  sense  an 
authority  to  barter. 

3.  P  authorizes  A  to  buy  goods  on  credit.  A  buys  goods  of  X  for  P 
and  gives  X  a  promissory  note  signed  "  P,  by  A,  agent."  P  is  not  bound.  An 
authority  to  buy  on  credit  is  not  an  ostensible  authority  to  make  negotiable 
paper.  {Problem  :  What  is  X's  remedy  upon  this  note  ?  See  sec.  120,  par.  4.) 

127.  Agent's  apparent  authority.  Apparent  authority  is  that 
authority  which  may  reasonably  be  inferred  from  the  circum- 
stances of  the  agency.  In  determining  whether  an  agent  has 
apparent  authority  to  do  a  particular  act  the  following  circum- 
stances may  be  considered. 

1 .  Powers  actually  conferred.  The  powers  actually  conferred 
may  be  the  limit  of  powers  real  and  ostensible.  This  is  partic- 
ularly the  case  where  the  authority  is  contained  in  a  formal 
power  of  attorney.  Such  an  instrument  is  construed  strictly, 
and  the  third  person  is  bound  to  examine  it  in  order  to  deter- 
mine the  extent  of  the  agent's  authority.  A  power  of  attorney 
to  sell  lands  in  New  York  would  confer  no  authority  to  sell 
lands  in  Massachusetts  (see  p.  220).  If  the  power  is  conferred 
in  an  instrument  not  under  seal,  or  orally,  the  construction  is 
more  liberal;  but  in  such  a  case  the  third  person  cannot  claim 
to  rely  upon  an  apparent  authority  if  he  knows  the  exact  terms 
of  the  actual  authority. 

2.  Poivers  incidental  to  those  conferred.  With  every  actual 
authority  goes  the  implied  authority  to  use  the  means  reason- 
ably necessary  to  carry  out  the  actual  authority.  An  authority 
to  sell  and  convey  real  property  carries  with  it  the  power  to 
make  a  deed  containing  the  usual  covenants  of  warranty,  and 
to  receive  the  purchase  money  upon  delivery  of  the  deed.  The 
authority  to  travel  at  the  principal's  expense  in  order  to  sell 
goods  carries  with  it  the  power  to  hire  a  horse  or  use  other 
reasonable  means  of  travel. 


§i27]  LIABILITY  OF  PRINCIPAL  229 

3.  Poivers  annexed  by  custom.  The  incidental  powers  may 
be  enlarged  by  custom  or  usage.  Some  agents,  like  factors, 
brokers,  and  auctioneers,  follow  a  customary  calling,  and  natur- 
ally many  usages  of  the  calling  have  grown  up.  One  who 
employs  such  an  agent  is  supposed  to  do  so  with  knowledge  of 
established  usages,  and  must  be  held  to  clothe  the  agent  with 
all  the  authority  customarily  exercised  by  agents  in  that  calling. 

4.  Powers  inferred  from  the  conduct  of  the  principal.  Over 
and  above  the  actual,  incidental,  and  customary  powers  of  an 
agent  there  may  be  apparent  powers  gathered  from  the  con- 
duct of  the  principal.  If  a  principal  by  his  conduct  leads  third 
persons  reasonably  to  infer  that  he  has  given  his  agent  certain 
powers,  and  they  act  upon  this  appearance  of  authority,  the 
principal  will  be  estopped  to  deny  that  his  agent  did  possess 
those  powers.  If,  after  an  agent  has  made  a  mortgage  invest- 
ment for  his  principal,  the  principal  permits  the  agent  to  retain 
the  bond  and  mortgage,  he  will  be  estopped  to  deny  that  the 
agent  had  authority  to  receive  the  interest  or  installments  due 
upon  the  securities. 

5.  General  and  special  agents.  A  general  agent  is  one  author- 
ized to  act  for  his  principal  in  all  matters  pertaining  to  a  par- 
ticular business.  A  special  agent  is  one  (other  than  an  agent 
following  a  customary  calling)  who  is  authorized  to  act  for  his 
principal  in  a  single  specific  transaction.  A  principal  impliedly 
confers  larger  powers  upon  a  general  agent  than  upon  a  special 
one.  A  third  person  should  know  that  an  agent  engaged  to  do 
one  special  act  is  likely  to  have  special  instructions,  and  should 
inquire  into  the  extent  of  the  authority.  In  such  a  case  the 
actual  authority  is  less  likely  to  be  enlarged  by  any  of  the  con- 
siderations above  enumerated  ;  but  even  in  such  a  case  private 
instructions  not  communicated  to  the  third  person  may  not 
avail  the  principal. 

Examples :  1 .  P  puts  his  grocery  store  in  charge  of  A,  as  general 
manager,  to  buy  and  sell  goods  and  transact  the  necessary  business. 
A  exchanges  sugar  for  eggs.    This  is  within  his  implied  powers. 

2.  P  authorizes  A  as  a  special  agent  to  sell  a  barrel  of  sugar.  A  ex- 
changes the  sugar  for  eggs.    This  is  not  within  his  implied  powers. 


230 


PRINCIPAL  AND  AGENT  [Ch.  X 


128.  Agents  following  customary  calling.  Some  forms  of 
agency  are  so  well  established  and  have  been  so  long  practiced 
that  they  have  gathered  a  considerable  body  of  customs  in  con- 
formity with  which  such  agencies  are  conducted.  A  few  of  these 
will  be  briefly  considered. 

i.  Factors.  Factors  or  commission  merchants  are  agents  whose 
regular  business  it  is  to  receive  consignments  of  goods  and  sell 
them  for  a  commission  or  percentage.  The  principal  is  bound 
by  the  customs  of  the  calling.  These  customs  have  been 
adopted  in  order  to  protect  innocent  purchasers  who  are  unable 
to  know  whose  goods  the  factor  is  selling  or  what  instructions 
the  owner  may  have  given.  The  factor  may  sell  at  any  price,  for 
cash  or  credit,  warrant  the  goods  if  such  goods  are  customarily 
sold  with  a  warranty,  and  may  take  negotiable  instruments  in 
a  sale  on  credit.  He  cannot  barter  the  goods.  At  common  law 
he  cannot  pledge  them  for  his  own  debt,  but  under  the  Factors 
Acts  an  innocent  pledgee  is  protected. 

2.  Brokers.  Brokers  are  agents  whose  regular  business  it  is 
to  make  contracts  without  having  possession  of  the  goods,  or 
to  negotiate  for  the  purchase  of  property,  or  for  loans,  or  for 
insurance,  and  the  like.  A  merchandise  broker  who  sells  goods 
has  less  apparent  authority  than  a  factor  because  he  has  not 
possession  of  the  goods.  He  cannot  receive  payment ;  he  can- 
not usually  warrant  the  goods ;  custom  may  permit  a  sale  on 
credit,  but  the  custom  in  this  respect  is  not  so  broad  as  in  the 
case  of  factors. 

3.  Auctioneers.  Auctioneers  are  agents  whose  business  it  is 
to  sell  property  publicly  to  the  highest  bidder.  Until  the  fall 
of  the  hammer  he  is  the  agent  of  the  seller  ;  after  that  he  is 
also  agent  of  the  buyer  so  as  to  enable  him  to  make  the  note 
or  memorandum  required  by  the  Statute  of  Frauds.  He  must 
sell  for  cash,  and  not,  unless  specially  authorized,  on  credit  or 
for  other  goods  or  for  negotiable  paper.  He  may  receive  pay- 
ment. He  cannot  warrant  unless  specially  authorized,  nor  can 
he  rescind  the  sale  when  once  made. 

4.  Attorneys  at  law.  An  attorney  at  law  is  an  agent  whose 
business  it  is,  as  a  duly  qualified  officer  of  the  court,  to  represent 


S  129]  LIABILITY  OF  PRINCIPAL  23 1 

his  principal  in  the  conduct  of  litigation  or  other  legal  pro- 
ceedings. He  has  implied  authority  to  control  the  proceedings, 
but  he  cannot  compromise  or  release  his  client's  claim  or 
give  up  any  substantial  right  of  his  client  unless  specially 
authorized.  He  may  receive  payment  in  full  and  give  a  release. 
He  is  bound  to  the  highest  good  faith  toward  his  client,  and  is 
liable  to  the  client  for  the  negligent  management  of  the  affairs 
intrusted  to  him. 

5.  Dank  cashiers.  A  bank  cashier  is  the  chief  executive  offi- 
cer of  a  bank.  Tellers  and  other  subordinate  officers  are  under 
his  control.  He  has  power  to  draw  checks  or  drafts  upon  the 
funds  of  the  bank  deposited  with  other  banking  or  trust  com- 
panies ;  to  indorse  and  transfer  for  collection,  discount,  or  sale 
the  negotiable  paper  or  other  securities  owned  by  the  bank  ; 
to  certify  checks  drawn  upon  the  bank  by  depositors  ;  to 
collect  moneys  due  the  bank ;  to  borrow  money  and  to  loan 
money. 

129.  Undisclosed  principal.  An  agent  in  making  a  contract 
may  do  so  in  his  own  name  without  disclosing  to  the  third 
party  that  he  is  in  fact  acting  for  a  principal.  Factors  usually 
make  contracts  in  this  way.  In  such  cases  the  agent  is  always 
liable,  but  the  principal  may  be  also.  Conversely  the  principal 
may  enforce  such  a  contract  against  the  third  party. 

1.  General  rule.  Subject  to  some  exceptions,  an  undisclosed 
principal  is  liable  to  third  parties  with  whom  an  authorized 
agent  has  dealt  within  the  scope  of  the  agency,  in  the  same 
way  and  to  the  same  extent  as  a  disclosed  principal,  although 
the  third  person  supposed  he  was  dealing  with  the  agent  as 
principal. 

The  rule  works  both  ways.  An  undisclosed  principal  may 
claim  the  benefits  of  a  contract  made  by  his  agent  in  the  course 
of  the  agency. 

Examples  :  1.  A  business  is  conducted  in  the  name  of  A,  who  buys  goods 
of  X.  Later  X  discovers  that  P  owns  the  business.  X  may  recover  the 
price  of  the  goods  from  P. 

2.  A  business  is  conducted  in  the  name  of  A,  who  sells  goods  to  X.  The 
owner,  P,  may  recover  the  price  of  the  goods  from  X. 


232  PRINCIPAL  AND  AGENT  [Ch.  X 

2.  Exceptions.  To  these  rules  there  are  some  exceptions, 
and  a  few  of  them  may  be  noted. 

(a)  If  the  principal  or  the  third  party  has  in  good  faith  settled 
his  account  with  the  agent,  he  is  no  longer  liable. 

Examples :  3.  If  A  conducts  P's  business  in  his  own  name  and  buys 
goods  of  X,  and  A  and  P  have  an  accounting  which  includes  this  item, 
X  cannot  afterwards  sue   P. 

4.  If  under  like  circumstances  A  sells  goods  to  X,  and  X  has  paid  A 
or  otherwise  settled  with  him,  P  cannot  afterwards  sue  X. 

(b)  In  contracts  under  seal  only  the  parties  named  in  the 
contract  can  sue  or  be  sued,  and  hence  an  undisclosed  principal 
could  neither  sue  nor  be  sued  upon  such  a  contract. 

Example  5.  A  sealed  instrument  is  signed  "  A.  B.,  C.  D.,  E.  F.,  Trustees 
of  the  X  Church."  The  church  is  not  liable.  The  instrument  should  be 
signed  "  The  X  Church,  by  A.  B.,  CD.,  E.  F.,  Trustees."  Had  this  been  a 
simple  contract  (not  under  seal),  the  church  could  have  been  sued  upon  it. 

(r)  In  negotiable  instruments,  only  the  party  named  as  maker, 
drawer,  or  indorser  can  be  sued.  Hence  if  an  agent  signs  such 
an  instrument  in  his  own  name,  he  alone  is  liable  upon  it.  So 
also  only  the  payee  can  sue ;  but  this  part  of  the  rule  is  not 
important,  since  the  payee  by  indorsing  the  instrument  could 
confer  upon  the  undisclosed  principal  or  any  other  person  the 
right  to  sue. 

Example  6.  A  buys  goods  for  P  without  disclosing  P,  and  gives  a 
promissory  note  to  X's  order,  signed  "  A,  agent."  X  cannot  sue  P  upon 
this.  The  word  "agent"  has  no  more  effect  than  if  A  had  signed  "A, 
shoemaker,"  or  "  A,  Republican."  These  are  mere  words  of  description. 
A  alone  is  liable.  Had  this  been  a  nonnegotiable  instrument  P  could  have 
been  sued  upon  it. 

(d)  If,  after  discovering  the  principal,  the  third  party  unequiv- 
ocally elects  to  hold  the  agent,  he  cannot  afterwards  proceed 
against  the  principal.  The  third  person  has  an  option  to  hold 
the  agent  to  the  contract  made  in  the  agent's  name,  or  to  dis- 
regard the  agent  and  proceed  against  the  principal.  But  he 
cannot  do  both.  He  must  elect,  and  his  election  once  made  is 
binding  upon  him. 


§§130,131]  LIABILITY  OF  AGENT  233 

130.  Frauds  by  agent.  If  in  the  course  of  an  authorized  nego- 
tiation for  the  principal  an  agent  makes  unauthorized  false 
representations,  amounting  to  fraud  or  deceit,  concerning  the 
subject-matter  of  a  contract,  the  principal  is  liable  in  the  same 
way  as  if  he  had  made  them  personally  (see  sec.  29  ante). 

If  the  agent  commits  a  fraud  for  his  own  benefit  and  not  for 
his  principal's,  but  by  means  of  instrumentalities  intrusted  to 
him  by  his  principal,  the  latter  may  be  liable. 

Examples :  1.  A  stock  transfer  agent  of  a  corporation  fraudulently 
issues  stock  certificates  and  sells  them  for  his  own  benefit.  The  corporation 
is  held  liable  in  New  York  and  many  other  American  states. 

2.  An  agent,  authorized  by  a  railway  company  to  receive  goods  and  issue 
bills  of  lading,  fraudulently  issues  bills  of  lading  for  wheat  where  no  wheat 
is  received,  and  sells  the  bills  of  lading  to  innocent  buyers.  In  New  York 
and  many  other  states  the  railway  is  liable,  but  England  and  some  of  our 
states  hold  otherwise. 

3.  A  is  both  telegraph  'operator  and  express  agent  at  M.  He  telegraphs 
X  in  the  name  of  X's  agent,  requesting  the  transmission  of  money  by 
express.  X  sends  the  money  by  express.  The  agent  takes  it  and  absconds. 
The  telegraph  company  is  liable  to  X. 

IV.   Liability  of  Agent  to  Third  Parties 

131.  Where  agent  alone  is  liable.  If  an  agent  exceeds  his 
authority  so  that  his  principal  is  not  bound,  the  agent  is  liable 
to  the  third  party  for  the  breach  of  his  warranty  of  authority. 
He  is  not  liable  on  the  contract  itself  when  that  was  made  in 
the  principal's  name.  The  agent  is  liable  for  any  fraud,  deceit, 
or  other  tort  committed  by  him  while  about  the  principal's 
business. 

If  an  agent  contracts  for  a  fictitious  principal,  he  is  liable 
upon  the  contract  himself. 

If  an  agent  signs  a  sealed  instrument  or  a  negotiable  instru- 
ment in  his  own  name,  or  in  his  name  with  merely  descriptive 
matter  after  it,  he  alone  is  liable  unless  the  body  of  the  instru- 
ment shows  by  its  recitals  that  it  is  the  principal's  promise. 

Example.  "  We,  as  trustees  of  the  X  Church,  promise  to  pay  to  the 
order  of  G.H.  one  hundred  dollars.    A.  B.,  C.  D.,  E.  F.,  Trustees  of  the 


234 


PRINCIPAL  AND  AGENT  [Ch.  X] 


X  Church."  This  binds  the  X  Church.  But  if  it  had  read,  "  We  promise  to 
pay,  etc.,"  and  been  signed  in  the  same  way,  the  church  would  not  have 
been  liable  (see  sec.  129,  par.  2  (b),  ante). 

132.  Where  both  principal  and  agent  are  bound.  In  a  contract 
made  by  an  agent  for  an  undisclosed  principal  both  are  bound, 
that  is,  the  third  party  may  elect  to  hold  either.  Even  a  writ- 
ten contract  (other  than  a  sealed  or  negotiable  one)  signed  by 
the  agent  alone  may  be  shown  by  parol  evidence  to  be  in  fact 
the  contract  of  an  undisclosed  principal.  This  has  already  been 
sufficiently  considered. 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  116.  What  is  the  meaning  of  agency  ?  Into  what  two  branches 
does  the  subject  fall?  Explain  each.  How  is  the  relation  created?  What 
is  the  problem  as  to  third  persons  ?  Why  is  it  difficult  ?  Why  is  or  is  not 
the  principal  or  master  liable  in  each  example  given  ? 

117.  May  an  infant  appoint  an  agent?  Is  the  appointment  voidable? 
Is  it  void?  Same  questions  as  to  an  insane  person?  a  married  woman? 
If  one  contracts  in  behalf  of  an  unincorporated  club  who  is  bound  ?  Is  a 
member  bound  who  votes  against  the  making  of  the  contract?  May  one 
partner  bind  another  by  appointing  an  agent?  May  an  agent  by  appointing 
a  subagent  bind  his  principal? 

Problem  1.  An  infant  P  authorizes  an  agent  A  by  power  of  attorney 
to  sell  and  convey  P's  real  property.  A  sells  and  conveys  P's  property. 
When  P  comes  of  age  can  he  ratify  this  sale  and  conveyance,  or  in  order 
to  make  it  valid  must  he  then  execute  a  new  conveyance?  What  of  an 
infant's  authority  to  an  agent  to  sell  a  horse  ?  to  buy  one  ? 

Problem  2.  P  when  sane  authorizes  A  to  buy  goods  for  him.  P  becomes 
insane,  and  A  afterwards  purchases  of  X,  who  does  not  know  of  P's  insanity. 
Is  P  bound? 

118.  Who  may  be  an  agent?    How  must  joint  agents  act?    Exception? 

119.  When  must  an  agent's  appointment  be  in  writing?  When  must  it 
be  under  seal?  Draw  a  power  of  attorney  to  collect  debts  and  give  receipts 
for  the  same. 

120.  What  is  ratification?  What  are  the  essentials?  If  in  Example  1 
A  had  bought  the  book  in  his  own  name  could  P  ratify  ?  Is  silence  ratifi- 
cation?   Can  one  ratify  a  forgery  of  his  name  to  an  instrument?  How  can 


REVIEW  QUESTIONS  AND  PROBLEMS  235 

one  be  estopped  in  such  a  case?  If  one  ratifies,  from  what  time  does  the 
contract  obligation  date  ?  If  one  refuses  to  ratify,  what  are  the  third  party's 
rights  ? 

Problem  J.  A  is  the  promoter  of  an  intended  corporation.  He  makes  a 
contract  for  it.  When  it  is  duly  chartered  the  corporation  ratifies  the  con- 
tract.   Is  it  liable  for  a  subsequent  breach  of  the  contract? 

Problem  4.  A  without  authority  makes  a  contract  in  his  own  name  but 
intending  it  for  the  benefit  of  P.  When  P  hears  of  it  he  ratifies  it.  Is  P 
bound  ? 

Problem  5.  A  without  authority  conveyed  P's  land  to  X.  P  received  the 
purchase  money.    X  claims  this  was  a  ratification.    Is  it  so  ? 

121.  What  is  a  wife's  implied  authority  as  agent?  an  infant  child's? 
an  unpaid  vendor's? 

122.  How  may  an  agency  be  terminated  by  act  of  the  parties?  If  a 
principal  terminates  it,  what  are  the  rights  of  the  agent?  of  third  parties? 
If  the  agent  terminates  it  before  the  contract  expires,  what  may  he  recover 
for  services  already  rendered?  What  is  the  effect  of  the  death  of  either 
party?    of  illness?    Effect  of  impossibility? 

Problem  6.  P  authorized  A  to  sell  his  lands.  Later  he  also  authorized 
B  to  sell  them.  On  September  9  A  sold  them  to  X.  On  September  10  B  sold 
them  to  Y.    P  conveyed  to  X,  and  Y  sues  P  for  breach  of  contract.    Result  ? 

Problem  7.  P  authorizes  A  to  receive  payments  of  X.  P  dies.  X  pays 
A,  neither  knowing  of  P's  death.     Is  the  payment  binding  upon  P's  estate  ? 

123.  What  is  an  irrevocable  agency?  What  is  a  power  coupled  with  an 
interest?    Illustrate. 

Problem  8.  P  borrowed  $2000  of  A,  and  gave  the  latter  a  power  to  collect 
certain  rents  and  pay  himself  from  the  proceeds.  P  died.  Was  the  agency 
to  collect  the  rents  terminated?  Suppose  a  tenant  had  paid  rent  to  A  after 
P's  death  ? 

124.  What  are  the  obligations  of  the  principal  to  the  agent  ?  What  are 
an  agent's  damages  when  the  principal  wrongfully  revokes  the  agency?  When 
an  agency  is  revoked  by  impossibility  or  by  the  death  of  the  principal  how 
much  may  an  agent  recover  ?    What  is  reimbursement  ?    What  is  indemnity  ? 

Problem  g.  A  agrees  to  work  for  P  for  a  year  at  #20  a  month.  At  the 
end  of  four  months  A  quits  the  employment  without  cause.  How  much  may 
A  recover  of  P  ? 

Problem  10.  In  a  similar  case  P  discharges  A  without  cause  at  the  end 
of  four  months.    How  much  may  A  recover  ? 

125.  What  are  the  agent's  duties?  Illustrate  each.  If  an  agent  acts  for 
his  principal  and  also  for  a  third  person,  what  is  the  result?  If  an  agent 
makes  a  secret  profit,  what  is  the  result  ?    May  an  agent  delegate  his  duties? 


236  PRINCIPAL  AND  AGENT  [Ch.  X] 

Explain  and  illustrate.  What  is  a  del  credere  agency  ?  How  does  it  differ 
from  a  sale  ?    What  are  the  obligations  of  a  gratuitous  agent  ? 

Problem  11.  P  directs  A  to  pay  taxes  on  P's  land.  A  neglects  to  do  so. 
The  lands  are  sold  for  taxes.  A  bids  them  in  and  takes  a  tax  deed.  Is  it 
good  against  P  ? 

Problem  12.  A  sold  for  P  certain  prize  packages  which  it  was  illegal  to 
sell,  and  received  the  money  for  them.  P  sues  A  for  the  money.  A  sets  up 
the  illegality.     Result? 

Problem  13.  P  authorizes  A  to  accept  bills  of  exchange  drawn  on  P. 
When  a  bill  comes  in,  A  decides  to  accept  it,  and  tells  B,  a  clerk,  to  write 
the  acceptance.  B  writes,  "Accepted,  P,  by  B."  Is  P  bound?  How  would 
it  be  if  A  had  told  B  to  exercise  his  judgment  and  accept  bills  and  B  had 
accepted  this  ? 

126.  State  the  rules  as  to  a  principal's  liability  to  third  persons  for  the 
acts  of  his  agent.    Illustrate. 

127.  How  is  an  agent's  apparent  authority  determined  ?  What  is  actual 
authority  and  how  determined?  What  are  incidental  powers?  Illustrate. 
What  are  customary  powers  ?  What  are  powers  arising  from  the  conduct 
of  the  principal  ?  Illustrate.  What  is  the  distinction  between  general  and 
special  agents  ?    Illustrate. 

Problem  14.  P  gives  A  general  authority  to  sell  goods.  A  sells  them  to 
X  and  warrants  them.    Is  P  bound  by  the  warranty? 

Problem  ij.  P  directs  A  to  loan  money  and  take  a  note  and  mortgage. 
A  does  so.  The  note  and  mortgage  remain  in  A's  hands.  The  borrower 
pays  A.    Is  P  bound  by  this  payment? 

Problem  16.  P  authorizes  A  to  make  collections.  X  gives  A  a  check 
payable  to  the  order  of  P.  A  indorses  the  check  in  P's  name,  obtains  the 
money,  and  absconds.    Does  the  loss  fall  upon  P  or  the  bank? 

128.  Define  factor.  Explain  his  powers.  Define  broker.  Distinguish 
from  factor.  Define  auctioneer.  Whose  agent  is  he?  Define  attorney  at 
law  and  state  some  of  his  powers.    State  the  powers  of  a  bank  cashier. 

Problem  ij.  A  broker  is  authorized  by  P  to  sell  goods  and  sells  them 
to  X.  P  delivers  the  goods  to  X.  The  broker  then  collects  the  price  from 
X  and  absconds.    P  sues  X  for  the  price.    Can  he  recover  ? 

Problem  18.  P  authorized  an  auctioneer  to  sell  his  farm  for  $500  cash 
down,  balance  in  thirty  days.  These  terms  were  publicly  stated  at  the  time 
of  the  auction.  The  auctioneer  sold  to  X  for  $3000,  and  took  X's  check  for 
the  #500.  X  had  no  funds  in  bank  to  meet  the  check,  but  two  days  later 
deposited  funds  and  the  check  was  paid  to  the  auctioneer.  Meanwhile  P 
had  learned  of  the  transaction  and  repudiated  the  sale.  X  now  sues  P  for 
breach  of  contract.    Result  ? 


REVIEW  QUESTIONS  AND  PROBLEMS  237 

129.  What  is  an  undisclosed  principal?  State  the  general  rule  as  to  the 
liability  of  an  undisclosed  principal.  State  the  general  rule  as  to  his  rights. 
State  the  exceptions  and  illustrate  each. 

Proble>n  ig.  P  owns  a  hotel.  He  conducts  it  in  the  name  of  A,  and  it 
is  supposed  that  A  is  the  proprbtor.  X  sells  cigars  on  credit  to  A  for  the 
hotel.  P  has  forbidden  A  to  buy  cigars  on  credit.  Is  P  liable  to  X  for  the 
cigars  ? 

Problem  20.  In  the  above  case  P,  after  learning  that  A  bought  on  credit, 
settled  with  the  agent,  paying  him  in  full  for  the  cost  of  the  cigars.  Can  X 
then  recover  of  P  ? 

Problem  21.  In  the  above  case  (Problem  19)  X,  after  learning  that  P  is 
the  true  principal,  sues  A  and  obtains  a  judgment  against  him.  This  remains 
unsatisfied,  and  he  then  sues  P.    Can  he  maintain  this  action? 

Problem  22.  In  the  above  case  (Problem  19)  X  warranted  the  cigars. 
They  turned  out  to  be  inferior  to  the  warranty.  Can  P  recover  against  X  for 
breach  of  the  warranty? 

Problem  23.  In  the  above  case  (Problem  22)  the  agent,  before  X  knows 
that  P  is  the  true  principal,  settles  with  X  for  the  breach  of  warranty.  Can 
P  now  sue  X  ? 

130.  Is  the  principal  liable  for  the  frauds  of  the  agent  committed  for  the 
principal's  benefit  ?    for  the  agent's  benefit  ?    Illustrate. 

Proble?n  24.  P  authorizes  A  to  sell  his  land.  A  sells  to  X  and  fraudu- 
lently represents  the  land  to  be  well  timbered  and  well  watered.  When  X 
discovers  the  fraud  he  sues  P,  who  has  received  the  purchase  money  without 
knowing  of  his  agent's  fraud.    Is  P  liable  to  X  in  this  action  for  deceit  ? 

131.  How  is  an  agent  liable  to  the  third  person  upon  an  unauthorized 
contract?  How  is  he  liable  if  he  deals  in  the  name  of  a  fictitious  principal  ? 
How  is  he  liable  if  he  signs  in  his  own  name  a  sealed  or  negotiable 
instrument  ? 

Problem  25.  P  authorizes  A  to  issue  insurance.  A  without  authority 
represents  to  X  that  he  may  keep  petroleum  upon  the  insured  premises. 
X's  premises  burn.  P  successfully  defends  an  action  upon  the  policy 
because  X  kept  petroleum.  X  sues  A  for  breach  of  his  warranty  of 
authority  to  make  such  representation.    Result? 

132.  Who  are  liable  on  an  authorized  written  or  oral  contract  made  by 
an  agent  in  his  own  name  ? 


CHAPTER  XI 
MASTER  AND   SERVANT 

I.  Injuries  to  Third  Persons 

133.  Negligent  torts  by  servants.  If  in  the  conduct  of  his 
master's  business  a  servant  negligently  injures  a  third  person 
(other  than  a  fellow-servant),  the  master  is  liable  to  the  injured 
person  ;  the  servant  is  of  course  also  liable,  because  every 
one  is  liable  for  his  own  torts.  But  if  the  injury  is  due  to  some 
contributing  negligence  of  the  third  person,  he  cannot  recover 
from  either  the  master  or  the  servant. 

Examples  :  I.  A  railway  engineer  negligently  runs  over  X  at  a  railway 
crossing.    The  railway  company  is  liable  to  X.    The  engineer  is  also  liable. 

2.  A  workman  negligently  allows  a  brick  to  fall  from  a  building  into 
the  street.  It  strikes  and  injures  X.  The  employer  of  the  negligent  work- 
man is  liable  to  X.    The  workman  also  is  liable. 

3.  A  servant  at  a  hotel  negligently  spills  soup  upon  a  guest's  dress.  The 
hotel  keeper  is  liable  for  the  damage.    The  servant  also  is  liable.  ^ 

4.  X  negligently  fails  to  look  and  listen  at  a  railway  crossing.  The 
engineer  negligently  fails  to  sound  a  signal.  X  is  struck  and  injured  by 
the  locomotive.  He  cannot  recover  because  of  his  contributory  negligence. 

134.  Willful  torts  by  servants.  A  master  is  liable  for  willful 
torts  committed  by  his  servant  in  the  course  of  the  employ- 
ment and  in  the  supposed  furtherance  thereof.  If  the  servant 
is  acting  for  the  master  and  supposes,  however  mistakenly,  that 
his  act  will  further  the  master's  interests,  the  master  is  liable. 

Examples:  1.  X's  vehicle  obstructs  the  M.  Street  Ry.  Co.'s  track.  S  is 
motorman  on  one  of  its  cars.  S  orders  X  to  get  off  the  track.  There  is  a 
dispute  and  S  purposely  drives  his  car  against  X's  vehicle  and  damages 
it.  The  Ry.  Co.  is  liable  if  S  did  this  in  order  to  get  a  clear  track  and  make 
his  schedule  time.    S  also  is  liable  for  his  own  tort. 

2.  S  sells  tickets  for  the  M.  Elevated  Ry.  X  buys  a  ticket  and  lays 
down  a  bill.    S  gives  X  the  change  and  then,  mistakenly  thinks  the  bill  is 

238 


[$  135]  INJURIES  TO  SERVANTS  239 

counterfeit  and  has  X  arrested.  The  Ry.  Co.  is  liable  for  false  imprisonment 
if  S  did  this  in  order  to  get  good  money  for  the  ticket;  but  if  S  did  it  to 
serve  the  public  and  punish  a  supposed  criminal,  the  Ry.  Co.  is  not  liable. 
In  either  case  S  is  personally  liable. 

A  public  carrier  of  passengers  is  liable  for  any  willful  injury 
done  to  a  passenger  by  one  of  its  employees,  whether  done  in 
the  supposed  discharge  of  a  duty  or  out  of  personal  malice. 
The  carrier  owes  a  very  high  duty  to  passengers. 

Example  3.  A  street-car  conductor  sees  one  of  his  enemies  on  the 
street  car  and  assaults  him  to  pay  off  an  old  grudge.  The  street-car  com- 
pany is  liable.    The  conductor  is  of  course  personally  liable. 

II.   Injuries  to  Servants 

135.  Injury  to  one  servant  by  another.  The  master  is  not  lia- 
ble to  one  servant  for  an  injury  occasioned  by  the  negligence 
of  a  fellow-servant.  He  is  liable  for  an  injury  occasioned  by 
the  negligence  of  a  vice  principal. 

A  vice  principal  is  one  who  is  charged  by  the  master  with 
the  performance  of  any  of  these  duties  :  (a)  providing  a  safe 
place  to  work;  (b)  providing  safe  tools;  (c)  providing  a  suffi- 
cient number  of  competent  servants ;  (d)  providing  suitable 
rules  and  regulations  to  govern  the  service ;  (c)  providing 
inspection  and  repair  of  instrumentalities;  (_/")  providing  special 
warning  of  any  extraordinary  danger.  If  one  charged  with  per- 
forming any  of  these  duties  is  negligent  in  the  performance 
thereof  and  an  employee  is  injured  in  consequence  of  such 
negligence,  the  master  is  liable.  The  master  does  not  insure 
safety  in' these  respects  ;  he  insures  that  due  care  will  be  taken. 

A  fellow-servant  is  one  who  performs  operative  acts.  If  in 
operating  machinery  or  in  any  similar  act  one  fellow-servant 
injures  another,  the  master  is  not  liable.  It  is  said  that  a  servant 
in  entering  the  employment  assumes  the  risk  as  to  the  negli- 
gence of  his  fellow-servants. 

Examples :  1.  S  and  T  are  both  employed  by  M.  S  is  told  to  repair  a 
machine  and  does  so  negligently.  The  machine  breaks  down  while  T  is 
operating  it  and  injures  T.  M  is  liable  to  T.  In  repairing  the  machine  S 
was  a  vice  principal. 


240  MASTER  AND  SERVANT  [Ch.  XI] 

2.  Owing  to  the  negligence  of  S  in  operating  a  machine  T  is  injured. 
M  is  not  liable  to  T.    In  operating  the  machine  S  is  a  fellow-servant  of  T. 

3.  Owing  to  the  negligence  of  a  railway  engineer  a  train  is  derailed  and 
a  brakeman  injured.  The  railway  company  is  not  liable  to  the  brakeman. 
An  engineer  is  a  fellow-servant  of  a  brakeman  ;  so  also  is  a  conductor ;  so 
also  is  a  switchman.    But  a  train  dispatcher  is  a  vice  principal. 

In  Ohio  and  some  other  states- a  superior  officer,  like  a  con- 
ductor or  a  manager  or  a  foreman,  is  always  a  vice  principal 
even  if  he  performs  operative  acts  ;  but  the  general  rule  is  that 
it  is  the  nature  of  the  act  and  not  the  rank  of  the  actor  that 
is  decisive.  Employers'  Liability  Acts  exist  in  several  states, 
enlarging  the  liability  of  the  master  to  one  servant  for  the  neg- 
ligence of  a  co-servant. 

136.  The  master's  nonassignable  duties.  The  duty  to  use 
care  to  furnish  safe  machinery,  safe  tools,  proper  inspection, 
and  the  like,  as  specified  in  sec.  135,  is  called  a  nonassignable 
duty,  because  no  matter  who  is  delegated  to  perform  it  the 
master  remains  liable  to  his  servants  for  any  negligence  in  that 
regard. 

This  rule  is  qualified  by  the  further  rule  that  if  a  servant 
with  full  knowledge  of  some  defect  remains  in  the  employment 
he  "assumes  the  risk"  as  to  the  defect  and  cannot  recover 
from  the  master  if  he  is  injured  in  consequence  of  it. 

Example  1.  S  is  told  to  operate  a  machine.  He  knows  it  is  defective. 
He  operates  it  and  is  injured  because  of  this  defect.    He  cannot  recover. 

But  if  the  master  promises  to  repair  the  defect,  the  servant 
may  remain  a  reasonable  time  without  assuming  the  risk. 

Example  2.  As  above.  S  objects  to  the  machine  because  it  is  defective. 
The  master  promises  to  repair  it.  The  next  day  S  is  injured.  The  master 
is  liable  to  S. 

In  any  case  a  servant  cannot  recover  if  his  injury  is  due  to 
his  own  contributory  negligence. 

Example  3.  S,  after  the  master's  promise  to  repair,  operates  the  machine. 
He  is  injured  by  his  own  negligence  in  the  manner  of  operating  it.  He  can- 
not recover. 


REVIEW  QUESTIONS  AND  PROBLEMS  241 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  133.  When  is  a  master  liable  for  negligent  injuries  by  his 
servant  to  a  third  person?    What  will  bar  the  action? 

134.  When  is  a  master  liable  for  willful  injuries  inflicted  by  his  servant 
upon  a  third  person  ?    What  is  the  rule  as  to  public  carriers  ? 

Proble7>t  1.  B,  a  boy  of  twelve,  steals  a  ride  on  a  freight  train.  The 
brakeman  discovers  him  and  pushes  him  off  while  the  train  is  in  motion, 
and  the  boy  is  injured.    Is  the  railway  company  liable? 

Problem  2.  B  is  employed  to  repair  electric  lights  in  X's  building.  While 
he  is  on  a  stepladder  X's  janitor,  who  is  sweeping  the  room,  pushes  the 
ladder  intentionally  and  B  falls  and  is  injured.    Is  X  liable? 

135.  Who  is  a  vice  principal?  Who  is  a  fellow-servant?  Is  a  superior 
officer  a  vice  principal?  What  is  the  usual  test  as  to  the  master's  liability 
to  one  employee  for  a  negligent  injury  by  another  employee  ?  What  is  the 
purpose  of  Employers'  Liability  Acts  ? 

Problem  3.  Owing  to  the  negligence  of  a  switchman  a  train  is  derailed 
and  the  engineer  injured.  Is  the  railway  company  liable  to  its  engineer  for 
the  negligence  of  its  switchman  ? 

Problem  4.  B  was  a  laborer  in  X's  factory.  C  was  superintendent  of 
the  factory.  B  was  lifting  a  flywheel  of  an  engine  off  from  its  center,  when 
C  negligently  turned  on  the  steam  and  started  the  wheel,  injuring  B .  Is  X 
liable  to  B? 

Problem  j.  A  workman  in  the  X.  Ry.  Co.'s  repair  shops  negligently 
repairs  a  locomotive  boiler.  When  it  is  used  it  explodes  and  injures  an 
engineer.    Is  the  railway  company  liable  ? 

136.  What  are  the  master's  nonassignable  duties?  How  may  the  risk 
as  to  these  be  shifted  to  the  employee  ?  What  is  the  effect  of  a  promise  to 
repair  a  defect  ?    What  is  the  effect  of  contributory  negligence  ? 

Proble?n  6.  B  was  X's  domestic  servant,  and  X  agreed  to  furnish  board 
and  lodging.  B's  room  leaked.  X  promised  to  repair  the  roof.  B  stayed, 
and  owins;  to  the  leak  took  cold  and  was  ill.    Is  X  liable  to  B  ? 


PART   V 

BUSINESS  ASSOCIATIONS 

CHAPTER  XII 

PARTNERSHIPS  AND  JOINT-STOCK  COMPANIES 

137.  Forms  of  conducting  business.  Business  may  be  con- 
ducted by  a  sole  trader,  or  by  a  partnership,  or  by  a  joint-stock 
company,  or  by  a  corporation. 

A  sole  proprietor  or  trader  is  one  who  conducts  his  business 
in  person  or  through  agents  without  admitting  any  one  else  to 
share  in  the  profits.  He  alone  owns  the  property  embarked  in 
the  business ;  he  alone  has  a  decisive  voice  in  the  management 
of  the  business  ;  and  he  alone  is  liable  for  debts  and  entitled 
to  credits.  He  may,  of  course,  have  agents  to  whom  he  intrusts 
many  important  matters,  but  they  are  his  employees  and  are 
responsible  to  him  alone. 

It  is  the  combination  of  persons  in  business  that  calls  for 
special  consideration. 

i.  Partiicrsliips.  In  order  to  increase  capital  and  make  it  pos- 
sible to  do  a  larger  business,  two  or  more  persons  may  combine 
and  do  business  together  as  one  firm.  A  partnership  involves 
a  high  degree  of  confidence  in  the  ability,  fidelity,  and  integrity 
of  one's  partners,  without  relieving  one  of  personal  liability  to 
third  persons  for  contract  obligations  and  torts.  The  partner- 
ship has  three  important  characteristics  :  (i)  the  death  or  retire- 
ment of  one  partner  dissolves  the  firm  ;  (2)  each  partner  is  an 
agent  for  the  firm  ;  (3)  each  partner  is  individually  liable  for 
the  debts  of  the  firm. 

243 


244  PARTNERSHIPS  [Ch.  XII 

2.  Joint-stock  companies.  The  joint-stock  company  is  a  large 
partnership  in  which  the  interests  are  represented  by  shares  of 
stock,  as  in  a  corporation.  It  differs  from  a  partnership  in  that 
the  death  or  retirement  of  a  shareholder  does  not  dissolve  the 
company  and  in  that  a  shareholder  is  not  an  agent  of  the  com- 
pany unless  duly  elected  or  appointed  as  such.  It  is  like  a 
partnership  in  that  each  member  is  individually  liable  for  the 
debts  of  the  company. 

3.  Corporations.  A  corporation  is  a  distinct  legal  entity 
independent  of  its  stockholders.  Partnerships  and  joint-stock 
companies  are  formed  by  the  agreement  of  the  members  and 
require  no  statutory  authorization.  A  corporation  is  the  crea- 
ture of  statute,  and  is  by  statute  given  a  legal  being  and  invested 
with  legal  powers  as  a  separate  entity.  Title  to  property  vests 
in  it,  not  in  its  members ;  it  acts  through  its  agents  as  a  legal 
person ;  it  is  liable  for  its  debts  and  torts,  and  no  liability 
(unless  expressly  fixed  by  statute)  rests  upon  its  members.  The 
last  feature  is  highly  important.  Persons  may  invest  money  in 
a  corporation  without  becoming  individually  liable  for  the  debts 
of  the  corporation,  while  in  a  partnership  or  joint-stock  com- 
pany each  partner  or  shareholder  is  individually  liable. 

Statutes,  of  course,  may  and  often  do  modify  these  results.  Thus  we 
have  full-liability  corporations  authorized  in  some  states,  while  we  also  have 
limited  partnerships  in  some.  In  the  full-liability  corporation  each  share- 
holder is  individually  liable,  while  in  the  limited  partnership  a  limited 
partner  is  not  individually  liable  beyond  a  specified  amount.  In  some  cor- 
porations the  statutes  make  shareholders  individually  liable  to  a  limited 
amount.    But  the  type  is  as  stated  above. 

I.   Partnerships 

138.  What  constitutes  a  partnership.  A  partnership  may  be 
general  or  limited,  and  partners  may  be  real  or  ostensible, 
active  or  dormant. 

1.  General  partnerships.  A  general  partnership  is  a  voluntary 
association  of  two  or  more  persons  under  an  agreement  to  carry 
on  in  common,  as  if  one  person  or  entity,  a  business  or  occupa- 
tion, and  to  share  as  common  owners  the  profits  of  the  enterprise. 


§i38]  WHAT  CONSTITUTES  245 

A  partnership  agreement  need  not  be  in  writing.  It  is  gen- 
erally in  writing,  however,  and  the  document  is  called  the 
Articles  of  Partnership  (see  p.  252  post). 

The  mere  sharing  of  profits  is  not  a  conclusive  test  of  the 
existence  of  a  partnership,  although  it  is  strong  evidence  of  it  ; 
an  agreement  to  share  both  profits  and  losses  is  still  stronger 
evidence.  It  is  often  difficult  to  decide  whether  or  not  a  par- 
ticular agreement  constitutes  a  partnership.  In  general  it  may 
be  said  that  there  must  be  a  community  of  interest  in  carry- 
ing on  a  business  by  which  each  is  usually  agent  for  the  others 
and  under  which  there  is  a  division  of  profits.  This  is  a  highly 
technical  subject  and  it  is  impossible  to  treat  it  here  in  detail. 

Two  persons  may  be  partners  as  to  third  persons  while  by 
force  of  the  agreement  between  themselves  they  are  not  part- 
ners as  to  each  other.  We  are  now  chiefly  concerned  with  the 
problem  whether  they  are  partners  as  to  third  persons. 

Examples :  1.  A  and  B  agree  to  carry  packages,  etc.,  for  hire.  A  is  to 
furnish  horse  and  cart  and  to  give  his  services.  A  is  to  receive  a  fixed  sum. 
They  are  to  divide  the  expenses  and  to  share  the  profits  over  and  above 
A's  fixed  salary.  This  is  a  partnership.  They  are  carrying  on  a  business 
in  common  with  a  view  to  profits.  One  may  in  such  case  be  paid  specially 
for  services. 

2.  An  owner  of  a  farm  let  it  on  shares  under  an  agreement  to  take  one 
half  the  products  of  the  farm  as  rent.  This  was  not  a  partnership  but  a 
lease,  with  an  uncertain  and  contingent  rental. 

3.  A  manufacturer  engages  an  agent  to  sell  goods,  agreeing  to  give  him 
one  third  the  net  profits  on  any  sales  made  by  him.  This  is  not  a  partner- 
ship but  an  agency.  The  agent  does  not  carry  on  in  common  with  the 
manufacturer  the  business  of  making  and  vending  the  goods. 

4.  M  furnishes  capital  to  start  a  retail  store.  N  puts  in  his  services  in 
managing  the  business.  They  agree  to  share  the  profits.  This  is  a  partner- 
ship.   They  carry  on  a  business  in  common  with  a  view  to  profits. 

5.  M  and  N  each  put  in  services  to  carry  on  in  common  a  law  business 
with  a  view  to  profits  which  they  are  to  share.    This  is  a  partnership. 

2.  Ostensible  partner.  If  a  man  holds  himself  out  as  a  part- 
ner, or  permits  others  to  hold  him  out  as  a  partner,  when  in 
fact  he  is  not,  he  becomes  liable  as  partner  to  third  persons 
who  deal  with  the  supposed  firm  relying  upon  this  appearance 
of  partnership. 


246  PARTNERSHIPS  [Ch.  XII 

Examples:  6.  M  and  N  dissolve  partnership.  M  allows  his  name  to 
remain  over  the  door  of  the  establishment  and  upon  the  letter  heads  used  in 
the  business.  X  sells  goods  to  the  supposed  firm  believing  M  to  be  still  a 
partner.  X  may  hold  M  liable  for  the  price  of  the  goods.  M  is  estopped 
by  his  conduct  to  deny  that  he  is  a  partner.  He  should  give  notice  to 
former  customers  of  his  withdrawal  from  the  partnership. 

7.  W  introduced  Y  to  X  as  the  moneyed  partner.  Y  was  not  a  partner, 
but  he  did  not  deny  W's  statement.  X  trusted  to  this  representation  and 
suffered  loss.  Y  is  liable.  He  is  estopped  to  deny  that  he  was  a  partner. 
"  If  a  man  won't  speak  when  he  should,  he  shan't  when  he  would." 

3.  Dormant  partner.  A  dormant  partner  is  one  who  is 
unknown  as  a  partner.  He  occupies  much  the  same  position 
as  an  undisclosed  principal.  He  is  liable  on  the  firm  contracts 
when  discovered,  and  he  is  entitled  as  a  partner  to  the  benefit 
of  them. 

4.  Limited  partnerships.  These  exist  only  by  force  of  stat- 
ute. They  are  partnerships  in  which  one  or  more  of  the  part- 
ners are  not  liable  for  partnership  debts  beyond  the  sum  each 
has  contributed  to  the  capital.  Such  partnerships  must  have 
at  least  one  general  partner  whose  liability  is  unlimited.  The 
general  partners  manage  the  business,  sharing  the  profits  with 
the  limited  partners.  The  statutes  prescribe  how  such  a  part- 
nership may  be  formed,  and  the  statutes  must  be  strictly  fol- 
lowed ;  any  violation  of  them  will  render  the  concern  a  general 
partnership.  The  theory  is  that  it  is  a  general  partnership 
except  so  far  as  the  statute  duly  complied  with  renders  it  a 
limited  partnership.  These  partnerships  have  never  been  author- 
ized in  England. 

5.  Who  may  be  a  partner.  Any  person  who  can  make  con- 
tracts may  become  a  party  to  a  partnership  contract.  By 
modern  statutes  married  women  may  make  contracts  and  hence 
may  become  partners,  although  some  states  do  not  permit  a 
married  woman  to  become  a  partner  with  her  husband.  Infants 
may  become  partners,  but  the  contract  is  voidable  at  the  will 
of  the  infant.  So  far,  however,  as  an  infant  has  actually  put 
his  property  into  a  partnership  he  cannot  withdraw  it  to  the 
prejudice  of  creditors.  A  corporation  cannot  become  a  partner 
unless  permitted  to  do  so  by  its  charter. 


§§  i39.  i4°]  POWERS  OF  PARTNERS  247 

139.  Rights  and  duties  of  partners  as  to  each  other.  Each  part- 
ner is  bound  to  exercise  toward  his  associates  in  the  partner- 
ship the  highest  good  faith.    He  can  make  no  secret  profits. 

Examples :  1 .  A  and  B  are  partners  in  a  grocery.  A  is  individually 
a  dealer  in  sugar.  A  without  B's  knowledge  sells  sugar  to  the  firm  at  a 
profit.    A  must  share  this  profit  with   B. 

2.  A,  B,  and  C  as  partners  are  lessees  of  a  store.  When  the  lease 
expires  A  renews  it  in  his  own  name.  A  is  held  a  trustee  of  this  lease  for 
the  benefit  of  the  partnership. 

Each  partner  is  bound,  unless  otherwise  stipulated,  to  use 
due  diligence  in  the  conduct  of  the  business,  and  can  claim  no 
compensation  except  his  share  of  the  profits.  But  if  one  part- 
ner willfully  neglects  the  business  and  throws  all  the  labor  upon 
another,  the  active  partner  may  be  allowed  compensation,  at  the 
discretion  of  a  court,  upon  a  final  accounting. 

Each  partner  may  claim  the  right  to  take  part  in  the  business 
and  each  is  entitled  to  have  the  business  conducted  according 
to  the  terms  of  the  agreement.  No  change  can  be  made  in  the 
nature  of  the  business  and  no  new  partner  can  be  admitted 
without  the  consent  of  each.  But  as  to  incidental  matters  a 
majority  may  rule. 

If  the  partnership  is  for  a  definite  period,  a  withdrawal  of 
one  partner  before  the  expiration  of  the  period,  without  the 
consent  of  the  others,  is  a  breach  of  contract  for  which  they 
may  recover  damages.  If  the  partnership  is  at  will,  a  partner 
may  retire  at  any  time.  One  partner  cannot  be  expelled  by 
the  others.  If  a  partner  sells  his  interest,  the  buyer  gets  only 
the  seller's  share  of  such  interest  as  remains  after  the  firm 
creditors  are  paid  and  the  partnership  is  wound   up. 

Each  partner  is  entitled  to  an  accounting  of  profits.  No 
action  at  law  can  ordinarily  be  maintained  by  one  partner 
against  the  others,  but  an  accounting  in  equity  may  be  had. 
If  one  has  paid  more  than  his  share  of  expenses,  he  is  entitled 
to  contribution  from  the  others. 

140.  Powers  of  partners.  Each  partner  is  an  agent  for  the 
others  in  the  conduct  of  firm  business,  and  the  partnership  is 
bound  by  any  contract  made  by  a  partner  within  the  scope  of 


248  PARTNERSHIPS  [Ch.  XII 

his  authority.  So  extensive  are  the  powers  of  each  partner  that 
one  ought  not  to  form  a  partnership  with  another  unless  he  has 
the  utmost  confidence  in  that  other's  integrity  and  judgment. 
The  following  are  some  of  the  powers  possessed  by  a  partner  in 
a  trading  partnership. 

i.  To  sell  or  mortgage  any  personal  property  belonging  to 
the  firm,  and  even  to  dispose  of  the  entire  stock  at  one  sale ; 
but  not  to  sell  real  property,  because  the  conveyance  must  be 
by  all  the  partners  or  by  one  authorized  by  power  of  attorney 
from  the  others  ;  and  not  to  transfer  firm  property  in  payment 
of  his  individual  debt. 

2.  To  purchase  any  goods  dealt  in  by  the  firm  or  usually 
employed  in  such  a  business,  but  not  other  or  different  goods  ; 
a  grocery  partnership  would  not  carry  any  implied  power  to 
purchase  shoes. 

3.  To  receive  payment  of  debts  due  the  firm  and  give  receipts. 

4.  To  make,  accept,  and  indorse  negotiable  instruments  in 
the  name  of  a  trading  firm,  that  is,  a  firm  that  buys  or  sells  ;  but 
in  a  nontrading  partnership,  as  a  law  firm,  a  hotel  firm,  or  a 
mining  firm,  a  partner  does  not  possess  this  implied  power. 

5.  To  borrow  money  on  the  credit  of  a  trading  firm  and  give 
security  by  pledge  or  mortgage  upon  the  firm  property ;  but 
not  in  the  case  of  a  nontrading  firm. 

6.  To  engage  agents  and  servants  for  the  conduct  of  the 
business. 

The  following  are  some  of  the  powers  which  a  partner  may 
not  exercise  without  the  consent  of  his  copartners. 

1.  To  bind  the  firm  by  deed. 

2.  To  bind  the  firm  by  a  guaranty  of  his  own  or  another's 
debt. 

3.  To  bind  the  firm  by  a  submission  to  arbitration  or  by  a 
confession  of  judgment. 

4.  To  assign  the  entire  firm  property  to  pay  the  firm  debts 
unless  the  other  partners  are  inaccessible  and  the  matter  is 
urgent. 

After  the  dissolution  of  a  firm  some  powers  remain  in  each 
partner  for  the  purpose  of  winding  up  its  affairs.    A  partner 


§§  i4i,  142]  RIGHTS  OF  CREDITORS  249 

may  still  sell  property  and  receive  and  pay  debts.  He  cannot 
make  new  contracts  or  issue  negotiable  instruments,  although 
he  may  indorse  an  instrument  "without  recourse"  in  order  to 
sell  or  collect  it. 

141.  Liabilities  of  partners.  The  obligations  of  a  partnership 
are  the  joint  obligations  of  its  members,  that  is,  the  action 
to  enforce  it  is  brought  against  all  jointly.  But  although  the 
creditor  brings  an  action  for  his  debt  against  all  the  members 
of  the  partnership  jointly  and  judgment  is  entered  against  them 
jointly,  he  may  satisfy  his  judgment  out  of  the  individual  prop- 
erty of  one  partner,  and  is  not  bound  to  levy  upon  the  joint 
partnership  property.  If  creditors  do  exhaust  the  partnership 
property,  they  may  then  go  against  the  individual  property  of 
the  partners  to  make  up  any  deficiency.  A  partner  who  thus 
satisfies  a  firm  debt  out  of  his  property  is  entitled  to  contribu- 
tion from  his  fellow-partners. 

An  outgoing  partner  remains  liable  to  creditors  for  debts 
contracted  while  he  was  a  partner  unless  they  release  him.  An 
incoming  partner  is  not  liable  for  debts  contracted  before  he 
became  a  member  of  the  firm  unless  he  assumes  and  agrees  to 
pay  them. 

Partners  are  liable  for  torts  committed  by  a  copartner  or 
a  servant  in  the  course  of  the  firm  business.  Such  liability  is 
joint  and  several,  that  is,  the  action  may  be  against  all  jointly 
or  against  one  or  against  several. 

142.  Rights  and  remedies  of  creditors.  A  partner  may  be 
liable  to  creditors  of  the  firm  of  which  he  is  a  member  and  also 
liable  to  individual  creditors  ;  he  has  partnership  property  and 
also  separate  property.  The  problem  arises  as  to  the  rights  of 
the  two  classes  of  creditors  in  the  two  classes  of  property. 

1.  Firm  creditors.  Firm  creditors  have  a  right  to  have  the 
partnership  property  applied  first  to  the  payment  of  the  partner- 
ship debts.  An  individual  creditor  of  a  partner  cannot  attach 
the  partner's  interest  in  the  partnership  to  the  prejudice  of  the 
partnership  creditors.  After  the  firm  creditors  are  paid  the 
separate  creditors  of  a  partner  are  entitled  to  any  surplus 
belonging  to  him. 


250  PARTNERSHIPS  [Ch.  XII 

Examples :  1.  A  and  B,  partners  in  a  grocery,  purchase  flour  of  X,  and 
A  purchases  a  watch  of  Y.  Y  obtains  judgment  against  A  for  the  watch, 
and  levies  upon  A's  interest  in  the  partnership.  X  afterwards  obtains  judg- 
ment against  A  and  B  for  the  flour  and  levies  upon  the  partnership  prop- 
erty. Y's  attachment  is  not  good  as  against  X's.  Y  can  obtain  any  interest 
remaining  in  A  after  X's  judgment  is  satisfied. 

2.  In  payment  for  the  watch,  A  turns  over  to  Y  a  horse  and  wagon 
belonging  to  the  firm.  If  Y  knew  this  was  firm  property,  he  cannot  hold  it 
against  firm  creditors.  If  he  took  it  believing  it  to  be  A's,  the  courts  differ 
as  to  whether  the  firm  creditors  can  recover  A's  interest  in  it. 

2.  Separate  creditors.  The  weight  of  authority  is  in  favor 
of  the  converse  of  this  rule,  namely,  that  the  separate  creditors 
of  a  partner  are  entitled  to  be  paid  first  out  of  his  separate 
estate.  After  the  separate  creditors  are  paid  the  partnership 
creditors  are  entitled  to  the  surplus. 

Examples  :  3.  A  and  B,  partners,  are  insolvent.  They  owe  X  $15,000. 
The  partnership  property  is  valued  at  $10,000.  A's  separate  property  is 
valued  at  $6000  and  he  owes  Y  $4000.  B  has  no  separate  property.  Y  will 
be  paid  in  full  out  of  A's  separate  property.  X  will  get  the  $10,000  of  joint 
property  and  the  surplus  of  $2000  from  A's  separate  estate. 

4.  As  above.  A  and  B  owe  X  $7000.  A  owes  Y  $14,000.  X  will  be 
paid  in  full.  Y  will  get  the  $6000  from  A's  separate  estate  and  A's  portion 
of  the  surplus  of  $3000  from  the  joint  property  after  X  is  paid  in  full. 

These  rules  are  thus  stated:  The  joint  estate  is  applied  to 
the  payment  of  joint  debts,  and  the  separate  estate  to  the  pay- 
ment of  separate  debts,  any  surplus  from  either  estate  being 
carried  over  to  the  other  if  necessary.  But  this  applies  only  when 
there  are  partnership  assets.  If  there  are  no  partnership  assets, 
the  firm  creditors  share  equally  with  the  individual  creditors. 

143.  Dissolution.  A  partnership  may  be  dissolved  in  conse- 
quence of  the  happening  of  any  of  the  following  events. 

1.  By  the  withdrawal  of  a  partner.  If  the  term  is  indefinite, 
a  partner  may  withdraw  at  will.  If  the  partnership  is  for  a 
definite  period,  the  withdrawal  of  a  partner  before  the  expira- 
tion of  the  period  subjects  him  to  an  action  for  damages,  but 
the  partnership  is  dissolved. 

2.  The  alienation  of  a  partner's  interest  works  a  dissolution; 
but  the  remaining  partner  may  form  a  new  partnership  with  the 
purchaser. 


§.43]  DISSOLUTION  251 

3.  The  bankruptcy  of  a  partner  works  a  dissolution  unless 
otherwise  agreed. 

4.  The  bankruptcy  of  a  firm  works  a  dissolution. 

5.  The  death  of  a  partner  works  a  dissolution  unless  other- 
wise agreed.  Title  to  partnership  property  remains  in  the  sur- 
viving partners  for  the  purpose  of  winding  up  the  partnership. 
They  must  first  pay  the  firm  debts  and  then  distribute  the 
remainder,  accounting  to  the  estate  of  the  deceased  partner  for 
his  share.  They  alone  sue  or  are  sued  upon  firm  accounts. 
But  if  the  firm  assets  are  insufficient  to  pay  the  firm  debts, 
recourse  may  be  had  against  the  estate  of  the  deceased  partner 
as  well  as  against  the  estates  of  the  survivors. 

6.  If  the  partners  are  subjects  and  residents  of  different 
countries  and  their  respective  countries  declare  war  against 
each  other,  this  works  a  dissolution  of  the  partnership. 

7.  A  court  may  decree  a  dissolution  for  the  misconduct  or 
insanity  of  a  partner  or  upon  a  showing  that  the  business  is 
carried  on  at  a  loss. 

Upon  a  dissolution  there  should  be  notice  to  third  persons  in 
order  that  each  partner  may  be  protected  against  further  con- 
tracts made  in  the  firm  name.  Special  notice  should  be  given 
to  those  accustomed  to  deal  with  the  firm,  and  general  notice, 
by  publication  in  a  newspaper,  to  the  public  at  large.  Existing 
creditors  must  be  paid  before  the  firm  assets  are  divided. 

Surviving  partners  have  power  to  wind  up  the  affairs  of  a 
partnership  after  dissolution.  The  representatives  of  a  deceased 
partner,  or  an  assignee  of  a  bankrupt  partner,  cannot  inter- 
fere except  to  protect  the  rights  of  the  deceased  or  bankrupt 
partner. 

The  property  may  be  sold  if  necessary.  The  good  will  is 
a  property  that  should  be  sold  if  it  has  pecuniary  value ; 
the  purchaser  acquires  the  right  to  carry  on  the  business 
under  the  old  name,  with  himself  named  as  successor  to  that 
business. 

After  firm  debts  are  paid  the  surplus  remaining  must  be  dis- 
tributed in  proportion  to  the  shares  or  interests  held  by  the 
respective  partners. 


252  PARTNERSHIPS  [Ch.  XII] 

II.  Joint-Stock  Companies 

144.  How  distinguished  from  ordinary  partnerships.  Joint-stock 
companies  are  large  partnerships  in  which  the  capital  is  divided 
into  shares  and  each  partner's  interest  is  represented  by  his 
ownership  of  these  shares.  Such  partnerships  are  legal  at  com- 
mon law,  but  they  have  very  generally  been  regulated  by  statutes. 

These  companies  differ  from  ordinary  partnerships  in  the 
following  respects. 

1.  They  are  not  dissolved  by  the  same  causes.  The  shares 
are  transferable.  If  a  shareholder  dies,  his  shares  pass  to  his 
estate;  if  he  becomes  bankrupt,  his  shares  pass  to  his  assignee; 
if  he  sells  his  shares,  the  transferee  succeeds  to  his  rights. 
There  may  be  the  withdrawal  of  partners  and  the  introduction 
of  new  partners  without  a  dissolution  of  the  company. 

2.  The  shareholders  do  not  all  participate  in  the  management, 
but  elect  directors  or  other  officers  who  conduct  the  business. 
Members  who  are  not  officers  have  no  authority  to  bind  the 
company.    The  articles  of  association  usually  regulate  this. 

145.  How  like  ordinary  partnerships.  Joint-stock  associations 
are  like  ordinary  partnerships  in  the  following  respects. 

1.  Each  member  is  personally  liable  for  the  debts  and  con- 
tracts of  the  company.  If  he  sells  his  shares,  he  remains  liable 
for  debts  contracted  while  he  owned  them. 

2.  Unless  otherwise  provided  by  statute,  all  the  members  must 
join  in  an  action  by  the  company,  and  as  many  as  the  creditor 
wishes  to  hold  must  be  joined  in  an  action  against  the  company. 
By  statute  in  New  York  and  some  other  states,  such  a  joint-stock 
company  may  sue  or  be  sued  in  the  name  of  its  president,  treas- 
urer, or  other  designated  officer  representing  all  the  members. 


Partnership  Agreement 

Articles  of  Agreement,  made  the  first  day  of  May,  one  thousand 
nine  hundred  and  one,  between  George  Rice,  of  the  city  of  Albany,  county 
of  Albany,  state  of  New  York,  and  Alfred  Post,  of  the  same  place, 

Witnesseth,  as  follows : 

I.  The  said  parties  above  named  have  agreed  to  become  partners  in 
business,  and  by  these  presents  do  agree  to  be   partners  together  under 


PARTNERSHIP  AGREEMENT  253 

and  by  the  name  or  firm  of  Rice  and  Post,  at  the  said  city  of  Albany,  in 
the  dry  goods  business,  buying  and  selling  all  sorts  of  goods,  wares,  and 
merchandise  to  the  said  business  belonging.  The  partnership  to  commence 
on  the  first  day  of  June,  1901,  and  to  continue  ten  years. 

II.  To  that  end  and  purpose  the  said  George  Rice  has  contributed  the 
sum  of  five  thousand  dollars  ($5000)  in  cash,  and  the  said  Alfred  Post  has 
contributed  the  lease  of  the  store  at  110  Main  Street,  in  the  said  city  of 
Albany,  to  be  occupied  by  them,  and  the  stock  of  goods  and  good  will  of 
the  business  there  heretofore  carried  on  by  him,  which  are  together  esti- 
mated and  valued  by  the  parties  at  the  like  sum  of  five  thousand  dollars 
($5000),  the  capital  stock  so  formed  to  be  used  and  employed  in  common 
between  them,  for  the  support  and  management  of  the  said  business,  to 
their  mutual  benefit  and  advantage. 

III.  At  all  times  during  the  continuance  of  their  partnership  they  and 
each  of  them  will  give  their  attendance,  and  to  the  utmost  of  their  skill  and 
power  exert  themselves  for  their  joint  interest,  profit,  benefit,  and  advantage, 
and  truly  buy,  sell,  and  merchandise  with  their  joint  stock,  and  the  increase 
thereof,  in  the  business  aforesaid.  And  they  shall  and  will  at  all  times  dur- 
ing the  said  partnership  bear,  pay,  and  discharge  equally  between  them  all 
rents  and  other  expenses  that  may  be  required  for  the  support  and  manage- 
ment of  the  said  business  ;  and  all  gains,  profit,  and  increase  that  shall 
come,  grow,  or  arise  from  or  by  means  of  their  said  business  shall  be 
divided  equally  between  them  on  the  first  day  of  June,  September,  Decem- 
ber, and  March,  in  each  year  during  the  continuance  of  said  partnership; 
and  all  loss  that  shall  happen  to  their  said  business  by  ill  commodities,  bad 
debts,  or  otherwise,  shall  be  borne  and  paid  between  them  equally. 

IV.  And  at  the  end  or  sooner  termination  of  their  partnership  the  said 
partners,  each  to  the  other,  shall  and  will  make  a  true,  just,  and  final 
account  of  all  things  relating  to  their  said  business,  and  in  all  things  truly 
adjust  the  same  ;  and  all  the  stock,  as  well  as  the  gains  and  increase  thereof, 
which  shall  appear  to  be  remaining,  either  in  money,  goods,  wares,  fixtures, 
debts,  or  otherwise,  shall  be  divided  between  them. 

In  Witness  Whereof,  the  parties  hereto  have  hereunto  interchange- 
ably set  their  hands,  the  day  and  year  first  above  written. 

In  the  presence  of  George  Rice. 

Warren  Jones.  Alfred  Post. 

State  of  New  York," 
County  of  Albany. 

On  this  first  day  of  May,  one  thousand  nine  hundred  and  one,  before 
me,  the  subscriber,  personally  appeared  George  Rice  and  Alfred  Post,  to 
me  personally  known  to  be  the  same  persons  described  in  and  who  executed 
the  foregoing  instrument,  and  they  severally  acknowledged  to  me  that  they 
executed  the  same.  Andrew  Johnson, 

Notary  Public  for  Albany  County,  New  York. 


254  PARTNERSHIPS  [Ch.  XII] 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  137.  What  is  the  object  of  forming  a  partnership?  What  are 
its  chief  characteristics  ?  Distinguish  a  joint-stock  company  from  a  partner- 
ship.   What  is  the  advantage  of  forming  a  corporation  ? 

138.  Define  partnership.  How  would  you  determine  whether  or  not  a 
particular  agreement  constitutes  a  partnership?  What  is  an  ostensible  part- 
ner? a  dormant  partner?  What  are  limited  partnerships?  Who  may  be  a 
partner? 

Problem  i.  D  loaned  a  firm  (B  and  C)  $2000  to  be  used  in  the  business, 
upon  an  agreement  that  he  was  to  have  one  third  of  the  profits.  X  sold 
goods  to  the  firm.  X  sues  D  as  a  partner  along  with  B  and  C.  Is  D  liable 
to  X? 

Problem  2.  In  the  above  case  D  is  to  receive  6%  interest  in  any  case, 
and  15%  of  the  profits  in  addition.     Is  D  liable  as  partner? 

Problem  j.  J.  H.  has  carried  on  business  in  his  own  name  and  X  has 
dealt  with  him.  He  sells  out  to  A  and  B,  who  continue  the  business  under 
the  name  J.  H.  &  Co.  They  order  goods  of  X  in  that  name  and  X  supplies 
them.  X  does  not  know  that  J.  H.  has  gone  out  of  the  business.  J.  H.  knows 
the  business  is  carried  on  under  the  name  J.H.  &  Co.     Is  J.H.  liable  to  X? 

Problem  4.  D  is  a  dormant  partner  in  the  firm  of  B  and  C.  X  does  not 
know  this.  He  sells  goods  to  B  and  C.  D  afterwards  withdraws.  X  then 
sells  more  goods  to  B  and  C.  (a)  Is  D  liable  on  the  first  sale?  (b)  Is  he 
liable  on  the  second? 

139.  State  the  duties  of  a  partner  toward  his  fellow-partners.  State  his 
rights.  Can  one  partner  claim  extra  compensation  ?  Can  one  partner  with- 
draw?   Can  one  sue  the  other  at  law? 

Problem  5.  A,   B,  and  C  agree   to   enter    into    partnership,  and  A  is  ' 
intrusted  with  the  purchase  of  a  horse.    He  buys  one  for  $200  but  charges 
it  to  the  firm  at  $300.     In  an  action  for  an  accounting  B  and  C  seek  to 
recover  from  A  $100  as  firm  money.    Result? 

Problem  6.  A  and  B  are  partners,  and  each  is  to  give  his  services  to  the 
firm  business.  A  becomes  ill  and  all  the  work  devolves  upon  B.  May  B 
claim  compensation  for  this  extra  labor? 

Problem  7.  In  the  above  case  A  neglects  the  business  willfully  and 
refuses  to  perform  any  services.  B  is  compelled  to  manage  the  whole  busi- 
ness alone.    May  B  claim  extra  compensation? 

140.  What  are  a  partner's  powers?  Can  he  sell  real  property,  and  why? 
Can  he  make  negotiable  instruments?  Can  he  borrow  money?  Can  he 
exercise  any  powers  after  the  dissolution  of  the  firm  ? 


REVIEW  QUESTIONS  AND   PROBLEMS  255 

Problem  S.  A  and  B  are  partners  and  owe  C  $650.  A  gives  C  a  mort- 
gage in  the  firm  name  on  the  personal  property  of  the  firm  to  secure  this 
debt.    Is  this  binding  on  B  or  on  the  firm  A  and  B  ? 

Proble»i  g.  A  gave  the  above  mortgage  to  secure  his  individual  debt. 
Does  this  bind  B  ? 

Problem  10.  B  and  C  are  partners  in  the  conducting  of  a  theater. 
B  borrows  money  for  the  business  and  gives  a  promissory  note  in  the  firm 
name.    Is  C  bound? 

141.  State  the  liabilities  of  a  partner.  How  is  an  action  brought  on  a 
debt  against  a  firm?  How  is  a  judgment  satisfied?  What  is  contribution? 
Is  an  incoming  partner  liable  for  debts  contracted  before  he  became  a  mem- 
ber of  a  firm?    How  may  an  action  for  tort  be  brought  against  a  firm? 

142.  State  the  rule  as  to  the  relative  rights  of  creditors  of  the  partnership 
and  creditors  of  a  partner. 

Problem  11.  A,  B,  and  C  are  equal  partners.  The  partnership  property 
is  worth  #10,000.  A  has  #5000  individually,  B  #4000,  and  C  no  assets. 
The  partnership  debts  amount  to  $12,000.  A's  debts  amount  to  #3000,  B's 
to  $6000,  and  C's  to  $2000.  Adjust  these  sums  among  the  firm  and  indi- 
vidual creditors. 

Problem  12.  Same  problem  if  firm  debts  were  only  $8000. 

143.  How  is  a  partnership  dissolved?  What  should  be  done  after  disso- 
lution? What  interest  have  the  representatives  of  a  deceased  partner  in 
a  partnership  of  which  the  deceased  was  a  member?  What  is  done  with  a 
surplus  after  firm  debts  are  paid  ? 

144.  How  do  joint-stock  companies  differ  from  partnerships  ? 

145.  How  do  they  resemble  partnerships  ? 


CHAPTER  XIII 
CORPORATIONS 

146.  Definition  and  classification.  A  corporation  is  an  artificial 
entity  created  by  statute  law  and  endowed  with  many  of  the  legal 
capacities  of  individuals,  as  the  power  to  take,  hold,  and  convey 
property,  make  contracts,  sue  and  be  sued,  and  the  like. 

It  is  a  legal  entity  distinct  from  its  members,  individually  or 
collectively.  It  may,  for  example,  sue  a  member  or  be  sued  by 
a  member.  It  may  sue  any  person  without  joining  its  members, 
and  may  be  sued  by  any  person  without  joining  its  members. 
The  title  to  property  vests  in  it  and  not  in  its  members.  Were 
all  the  members  to  unite  in  one  deed,  they  could  not  convey  the 
property  of  the  corporation.  It  is,  within  its  charter  powers, 
regarded  for  all  purposes  as  an  artificial  person, — a  distinct 
member  of  the  business  community. 

Public  corporations  are  political  entities  created  for  govern-, 
mental  purposes,  as  counties,  cities,  and  the  like. 

Private  corporations  are  created  for  the  promotion  of  some 
interest  in  which  their  members  are  concerned.  These  fall  into 
two  main  classes,  —  stock  corporations,  which  are  for  private 
pecuniary  gain,  and  membership  or  nonstock  corporations, 
which  are  for  a  variety  of  purposes,  as  clubs,  charitable  socie-; 
ties,  educational  institutions,  and  the  like. 

Stock  or  business  corporations  are  those  with  which  we  are 
concerned.  They  are  intended  to  enable  a  number  of  persons 
to  unite  their  capital  in  one  enterprise  with  two  important 
results  :  first,  the  power  to  transfer  their  shares  to  other  holders 
without  affecting  the  business,  and  second,  an  exemption  from 
any  personal  liability  for  the  debts,  contracts,  or  torts  of  the; 
corporation.  A  partnership  accomplishes  neither  of  these  results. 
A  joint-stock  company  accomplishes  the  first  but  not  the  second. 

256 


[§M7]  HOW  FORMED 


257 


147.  How  a  corporation  is  formed.  A  corporation  is  created  by 
legislative  grant.  Some  are  created  by  a  special  statute  which 
names  the  corporation  and  defines  its  powers,  but  state  con- 
stitutions very  generally  prohibit  the  legislatures  from  charter- 
ing private  business  corporations  by  special  act.  Business  cor- 
porations are  now  usually  created  under  a  general  statute  which 
permits  a  number  of  persons  to  form  a  corporation  by  execut- 
ing and  filing  with  some  designated  public  official  articles  of 
association  or  incorporation.  The  certificate  contains  the  name 
of  the  corporation,  its  object,  the  amount  of  capital  stock,  the 
number  of  shares  into  which  the  capital  stock  is  divided,  the  place 
where  its  principal  business  office  is  to  be  located,  the  dura- 
tion of  the  corporation,  the  number  of  its  directors  with  the 
names  and  addresses  of  those  who  are  to  serve  at  the  outset, 
and  in  some  states  the  names  and  addresses  of  the  subscribers 
to  the  stock  with  the  amount  subscribed.  Often  the  statute 
requires  that  a  specified  number  of  the  incorporators  shall  be 
citizens  of  the  United  States,  and  a  specified  number  citizens 
of  the  state  under  whose  statute  the  certificate  is  filed.  Some 
statutes  require  that  the  name  of  an  officer  or  agent  upon  whom 
legal  process  may  be  served  shall  also  be  specified. 

The  statute  under  which  a  certificate  is  made  and  the  certifi- 
cate itself  constitute  together  the  charter  of  the  corporation 
and  define  and  limit  its  powers. 

Example  of  New  York  Certificate 

We,  the  undersigned,  all  being  persons  of  full  age,  and  at  least  two  thirds 
citizens  of  the  United  States,  and  at  least  one  of  us  a  resident  of  the  state 
of  New  York,  desiring  to  form  a  stock  corporation,  pursuant  to  the  provi- 
sions of  the  Business  Corporation  Law  of  the  state  of  New  York,  do  hereby 
make,  sign,  acknowledge,  and  file  this  certificate  for  that  purpose,  as  follows  : 

First.  The  name  of  the  proposed  corporation  is  Cayuga  Manufacturing 
Company. 

Second.  The  purposes  for  which  it  is  to  be  formed  are  to  manufacture, 
sell  and  trade  in  agricultural  implements  and  machinery. 

Third.  The  amount  of  capital  stock  is  one  hundred  thousand  dollars. 

Fourth.  The  number  of  shares  of  which  the  capital  stock  shall  consist 
is  one  thousand,  and  the  amount  of  capital  with  which  said  corporation 
will  begin  business  is  twenty  thousand  dollars. 


258 


CORPORATIONS  [Ch.  XIII 


Fifth.  The  principal   business    office    is    to    be  located   in  the   city  of 
Ithaca,  in  the  county  of  Tompkins,  state  of  New  York. 
Sixth.   Its  duration  shall  be  fifty  years. 
Seventh.  The  number  of  its  directors  is  to  be  five. 

Eighth.  The  names  and  post-office  addresses  of  the  directors  for  the  first 
year  are  as  follows  : 

[Here  insert  five  names  and  addresses.] 

Ninth.  The  names  and  post-office  addresses  of  the  subscribers,  and  a 
statement  of  the  number  of  shares  of  stock  which  each  member  agrees  to 
take  in  the  corporation,  are  as  follows : 

[Here  insert  names,  addresses  and  amounts  subscribed.] 
In  Witness  Whereof,  we  have  signed,  acknowledged  and  filed  this 
certificate  in  duplicate. 

Dated  this  ioth  day  of  January,  1905.  John  Doe. 

Richard  Roe. 
Henry  Fenn. 
John  S.  Dale. 

r  „T       ,r    .  Wm.  Blackheath. 

State  of  New  York,    1 

f  ss. 
County  of  Tompkins.  J 

On  the  ioth  day  of  January,  1905,  before  me  personally  appeared  John 
Doe,  Richard  Roe,  Henry  Fenn,  John  S.  Dale,  and  Wm.  Blackheath,  to  me 
personally  known  to  be  the  persons  described  in  and  who  made  and  signed 
the  foregoing  certificate,  and  severally  duly  acknowledged  to  me  that  they 
had  made,  signed  and  executed  the  same  for  the  purposes  therein  set  forth. 

George  Redbank,  Notary  Public. 

[This  is  filed  and  recorded  in  the  office  of  the  Secretary  of  State,  and  a  certified  copy  or 
duplicate  original  is  filed  and  recorded  in  the  office  of  the  clerk  of  Tompkins  county.  Fees 
are  required  for  filing  and  recording.  An  organization  tax  must  also  be  paid  to  the  State 
Treasurer.] 

148.  Members.  The  members  of  a  business  corporation  are 
those  who  hold  its  stock ;  they  are  called  stockholders  or  share- 
holders. The  relation  of  stockholders  to  a  corporation  and  to 
each  other  is  contractual.  At  the  outset  individuals  subscribe 
for  shares  of  stock,  that  is,  contract  to  take  them  when  issued, 
and  thereby  agree  to  associate  themselves  as  stockholders 
according  to  the  provisions  of  the  charter  and  the  terms  of  the 
subscription.    They  also  agree  to  pay  for  the  stock  when  issued 


§148]  MEMBERS  259 

or  when  payment  may  be  called  for.  When  a  stockholder  has 
fully  paid  for  his  stock,  he  is  under  no  further  liability  unless  the 
stock  is  by  statute  or  contract  made  subject  to  assessments. 

When  a  stock  certificate  has  been  issued  the  owner  may 
transfer  it  and  the  transferee  becomes  a  stockholder.  The 
transfer  is  not  complete  until  the  new  holder's  name  is  substi- 
tuted on  the  books  of  the  corporation.  It  is  usual  to  indorse  on 
the  certificate  of  stock  a  power  of  attorney  to  the  new  holder 
to  make  the  transfer.  When  a  certificate  is  so  indorsed  with 
the  name  of  the  transferee  left  blank,  the  certificate  may  pass 
from  hand  to  hand  until  some  holder  chooses  to  insert  his 
name  and  have  the  transfer  made  to  him  upon  the  books.  But 
such  stock  certificates  do  not  have  the  characteristics  of  negoti- 
able paper.  Infants  and  others  not  competent  to  contract  may 
become  transferees  and  holders  of  stock  in  a  corporation. 

A  stock  certificate  is  the  written  evidence  issued  by  the  cor- 
poration that  the  person  named  in  it  is  registered  on  the  books 
of  the  company  as  the  owner  of  a  specified  number  of  its  shares 
of  capital  stock,  each  of  a  certain  par  value. 

Form  of  Stock  Certificate 


No.  38. 


No.  of  shares,  10 . 

Par  value  of  each,  $100. 


The  Cayuga  Manufacturing  Company. 

CJ)tEi  tS  tO  Cfrtifp  that  John  Doe  is  the  owner  of  ten  shares  of  the 
capital  stock  of  the  Cayuga  Manufacturing  Company,  transferable  only 
on  the  books  of  the  company  by  the  holder  thereof,  in  person  or  by  attorney, 
upon  the  surrender  of  this  certificate  properly  indorsed. 

2Fn  52?ttnce«6  32?I)CTCOf,  the  said  Company  has  caused  its  corporate  seal 
to  be  affixed  hereto  and  this  certificate  to  be  signed  by  its  presi- 
dent and  treasurer. 


Corporate 
Seal 


Ithaca,  New  York,  Jan.  24,   1905. 

Henry  Fenn,  President. 
WM.   Blackheath,  Treasurer. 


26o  CORPORATIONS  [Ch.  XIII 

Form  of  Transfer  on  Back  of  Stock  Certificate 


For  value  received,  I  hereby  sell,  assign,  and  transfer,  unto 

shares  of  the  within- 


mentioned  stock,  and  do  hereby  constitute  and  appoint 

my  true  and  lawful  attorney 

to  transfer  the  same  on  the  books  of  the  company. 

Witness  my  hand  and  seal,  this day  of , 

19 

Witness : 

(Seal) 


149.  Directors.  In  a  corporation  the  members  (stockholders) 
are  not  as  such  agents  of  the  corporation.  They  have  the 
power,  however,  to  elect  the  directors,  who  are  the  ultimate 
managers  of  the  business  and  who  appoint  the  necessary  active 
agents  and  officers. 

Directors  are  elected  by  a  majority  vote  of  the  stockholders, 
each  stockholder  usually  having  one  vote  for  each  share  of 
stock  he  owns.  It  follows  that  if  one  person,  or  a  group  of 
persons  acting  together,  owns  a  majority  of  the  stock,  he,  or 
they,  can  elect  all  the  directors.  To  avoid  this,  some  statutes 
provide  for  cumulative  voting.  For  example,  if  three  directors 
are  to  be  elected,  a  stockholder  with  ten  shares  may  cast  ten 
votes  for  each  of  three  or  may  concentrate  thirty  votes  upon 
one.  If  there  are  1000  shares  of  stock,  and  the  majority  acting 
together  own  740,  and  the  minority  260,  the  latter  by  casting 
triple  votes  for  one  candidate  would  give  him  780  votes,  or 
more  than  the  majority  casting  single  votes  for  each  of  three 
could  muster.  Thus  the  minority  would  elect  one  director  and 
the  majority  two.  The  registered  stockholder  is  usually  the 
only  one  entitled  to  vote.  It  is  commonly  provided  that  a 
stockholder  may  vote  by  "proxy,"  that  is,  authorize  another  to 
vote  for  him. 

The  powers  of  the  directors  are  very  extensive  and  are  fixed 
by  the  charter  of  the  corporation.  The  directors  are,  when  con- 
vened as  a  board,  the  embodiment  of  all  corporate  powers  except 


§iSo]  OFFICERS  AND  AGENTS  26 1 

those  which  must  be  exercised  by  the  stockholders.  They  could 
not  change  the  nature  or  the  purposes  of  the  corporation, 
increase  or  decrease  its  capital  stock,  dissolve  it,  or  consolidate 
it  with  another  corporation  ;  these  powers  are  vested  in  the 
stockholders.  But  in  the  management  of  the  corporation  within 
the  limits  of  the  charter  powers  the  directors  are  supreme. 

Directors  are  bound  to  exercise  reasonable  care  in  the  con- 
duct of  the  corporate  business,  and  may  become  liable  to  the 
corporation  for  losses  resulting  from  their  negligence.  Direct- 
ors also  stand  in  a  fiduciary  relation  to  the  stockholders,  and 
cannot  secure  to  themselves  any  advantage  at  the  expense  of 
stockholders. 

Statutes  often  require  directors  to  file  annual  reports  with 
some  public  officer,  and  fix  a  penalty  for  failure  to  do  so  or  for 
the  filing  of  a  false  report. 

150.  Officers  and  agents.  The  officers  of  a  corporation  are 
appointed  by  the  directors  in  conformity  with  the  by-laws. 
Agents,  other  than  officers,  are  sometimes  appointed  by  the 
directors  and  sometimes  by  an  officer.  The  general  law  of 
agency  governs  the  ostensible  powers  of  such  officers  and 
agents,  except  that  third  persons  are  supposed  to  know  the 
provisions  of  the  charter  as  to  the  powers  of  the  corporation 
itself,  and  perhaps  the  provisions  of  the  by-laws  as  to  the 
powers  of  the  officers.  Officers  and  agents  are  entitled  to  com- 
pensation, but  directors  are  not  unless  it  is  especially  voted  by 
the  shareholders. 

The  powers  of  the  officers  are  usually  fixed  by  the  by-laws 
of  the  corporation.  When  the  by-laws  do  not  fix  the  powers, 
they  may  be  prescribed  by  the  directors. 

The  president  is  always  a  member  of  the  board  of  direct- 
ors, and  usually  presides  as  its  chairman.  He  is  ordinarily 
empowered  to  execute  contracts,  deeds,  and  other  documents, 
either  by  general  or  by  special  vote  of  the  directors,  and  is  the 
chief  officer  in  whom  is  vested  the  largest  measure  of  authority. 

The  vice  president  acts  when  the  president  is  absent,  or,  in 
large  corporations,  he  has  some  special  department  of  the  busi- 
ness confided  to  him.    In  large  corporations  there  are  often 


262  CORPORATIONS  [Ch.  xiii 

several  vice  presidents,  known  as  first  vice  president,  second 
vice  president,  etc. 

The  secretary  keeps  the  records  of  the  meetings  of  the 
directors  and  stockholders.  He  is  also  usually  the  custodian 
of  the  seal  of  the  corporation  and  attaches  it  to  documents 
requiring  a  seal;  he  may  also  attest  the  signature  of  the  presi- 
dent to  contracts,  deeds,  etc.,  although  this  is  more  commonly 
done  by  the  treasurer.  He  has  charge  of  the  transfer  of  the 
stock  certificates  on  the  books  of  the  corporation,  and  may  be 
designated  as  an  assistant  to  the  treasurer. 

The  treasurer  is  the  fiscal  agent  of  the  corporation.  He  has 
charge  of  its  funds,  its  bank  account,  its  securities  and  general 
assets.  The  books  are  kept  under  his  supervision.  He  usually 
countersigns  the  obligations  issued  by  the  corporation  in  the 
form  of  contracts,  checks,  notes,  etc.,  indorses  for  deposit  or 
collection  the  checks  payable  to  it,  and  in  general  handles  its 
money  and  negotiable  paper. 

The  general  manager  is  the  chief  assistant  of  the  president, 
and  the  officer  with  whom  persons  having  business  with  the 
corporation  generally  deal.  He  usually  appoints  the  subordi- 
nate agents  and  servants,  makes  contracts  for  ordinary  supplies 
and  the  sale  of  products,  and  conducts  the  routine  business 
affairs  of  the  concern.  In  the  case  of  unusual  contracts  it  is 
always  best  to  ascertain  from  the  president  whether  the  general 
manager  has  authority. 

As  there  are  some  contracts  which  even  the  president  can- 
not make  without  special  authority  of  the  directors,  such  as  the 
issuing  of  bonds  and  notes  for  borrowing  money,  the  sale  of 
corporate  assets  and  franchises,  and  the  like,  it  is  necessary  in 
cases  of  doubt  to  make  sure  that  the  act  is  duly  authorized.  It 
is  not  uncommon  for  a  corporation  to  repudiate  a  contract  upon 
the  ground  that  the  officer  making  it  exceeded  his  authority. 

151.  Powers  of  a  corporation.  A  corporation  as  such  may  be 
said  to  possess  at  the  least  these  necessary  powers  and  qualities: 

I.  To  have  a  corporate  name,  as  an  individual  has  a  name; 
but  once  adopted,  the  name  of  a  corporation  can  be  changed 
only  as  prescribed  by  law. 


§  151]  POWERS  263 

2.  To  have  a  corporate  seal. 

3.  To  sue  and  be  sued  in  its  corporate  name. 

4.  To  appoint  such  officers  and  agents  as  its  business  may 
require. 

5.  To  make  by-laws  for  the  management  of  its  business,  the 
transfer  of  its  stock,  the  calling  of  meetings,  etc. 

6.  To  acquire  and  dispose  of  such  property  in  its  corporate 
name  or  under  its  corporate  seal  as  may  be  necessary  to  its 
corporate  existence  or  purposes.  The  amount  of  real  estate 
it  may  hold  is  often  limited  by  law.  In  the  absence  of  such 
express  restriction,  it  may  hold  only  what  is  reasonably  neces- 
sary. It  could  not  unless  expressly  authorized  engage  in  real 
estate  speculations. 

7.  To  make  such  contracts  as  are  reasonably  necessary  to 
carry  out  the  purposes  for  which  it  is  organized.  This  includes 
the  power  to  borrow  money,  give  security,  and  issue  negotiable 
paper,  as  well  as  to  make  the  ordinary  contracts  of  sale,  agency, 
etc.  But  a  corporation  cannot,  unless  expressly  authorized, 
enter  into  a  partnership  with  other  corporations  or  with  indi- 
viduals ;  nor  can  it  enter  into  a  so-called  "trust"  in  order  to 
create  a  monopoly  or  eliminate  competition. 

8.  In  general,  a  corporation  may  engage  in  such  business  as 
its  charter  contemplates,  and  in  no  other.  A  partnership  may 
engage  in  almost  any  lawful  business  ;  but  a  corporation  has  no 
powers  except  those  expressly  conferred  or  those  reasonably 
incident  to  those  expressly  conferred.  A  corporation  author- 
ized to  manufacture  and  sell  machinery  cannot  engage  in  the 
banking  business  or  the  transportation  business.  Such  acts  in 
excess  of  powers  granted  are  said  to  be  ultra  vires.  It  has  been 
held  that  a  railroad  company  could  not  run  a  steamboat  beyond 
its  terminus,  though  it  might  run  one  as  a  ferry  to  connect  its 
lines.  So  a  steamboat  company  could  not  run  a  railroad,  though 
it  might  run  a  short  line  as  a  "  carry  "  between  two  navigable 
points.  Certain  powers  are  regarded  as  incidental  to  the 
express  powers,  but  these  do  not  extend  beyond  the  necessities 
of  the  corporate  business,  and  are  not  to  be  so  broadly  con- 
strued as  to  lead  the  corporation  into  unauthorized  enterprises. 


264  CORPORATIONS  [Ch.  XIII 

152.  Stockholders'  rights.  Each  stockholder  has  these  rights 
as  against  the  corporation: 

1.  To  have  issued  to  him  a  certificate  of  stock  representing 
his  interest,  and,  if  he  is  a  transferee,  to  have  the  transfer 
entered  on  the  books  of  the  company. 

2.  To  vote  at  stockholders'  meetings.  By  the  generally  pre- 
vailing rule  each  stockholder  has  as  many  votes  as  he  has 
shares  of  stock.  He  may  exercise  his  right  personally  or  by 
proxy.  The  stockholder  of  record,  that  is,  the  one  whose  name 
appears  on  the  books  of  the  corporation,  is  entitled  to  vote 
although  he  has  transferred  the  stock. 

3.  To  inspect  the  books  of  the  company  when  a  demand  to 
do  so  is  made  in  good  faith  and  for  a  proper  purpose. 

4.  To  participate  in  dividends  when  the  same  have  been 
declared.  The  profits  of  the  corporate  enterprise  are  from  time 
to  time  divided  among  the  stockholders  in  the  form  of  divi- 
dends, each  stockholder  getting  a  per  cent  upon  the  face  value 
of  his  stock.  If  dividends  are  about  equal  to  the  interest  upon 
normal  safe  investments,  the  stock  remains  at  or  near  par, 
that  is,  a  $100  share  of  stock  sells  for  $100.  If  the  dividends 
are  large,  the  stock  goes  above  par;  if  small  or  uncertain,  the 
stock  goes  below  par.  If  no  dividends  are  paid,  the  stock  may 
become  valueless  except  for  voting  purposes  and  to  enable 
holders  to  control  the  corporation. 

Profits  are  what  remains  after  deducting  running  expenses, 
improvements,  accrued  debts,  interest  on  bonds,  a  fair  reserve 
for  depreciation  in  buildings,  machinery,  or  other  equipment, 
and,  perhaps,  a  sinking  fund  for  the  payment  of  the  bonds. 

Directors  have  a  large  discretion  in  the  matter  of  declaring 
dividends,  and  may  add  profits  to  capital  instead  of  distributing 
them,  so  long  as  they  act  in  good  faith. 

Preferred  stock  is  that  upon  which  it  is  agreed  to  pay  a  fixed 
rate,  practically  an  interest  rate,  before  any  dividends  shall  be 
declared  upon  the  common  (nonpreferred)  stock. 

Bonds  are  promises  to  pay  a  principal  sum  with  interest,  and 
are  usually  secured  by  mortgage  upon  the  corporate  property. 
Bondholders  arc   simply  creditors.    A  coupon  bond  is  one  to 


§§i53.i54]  STOCKHOLDERS'   LIABILITIES  265 

which  separate  interest  coupons  are  attached  for  each  annual 
or  semiannual  interest  payment  (see  p.  179  ante). 

5.  A  stockholder  in  behalf  of  himself  and  other  stockholders 
may  invoke  the  aid  of  a  court  to  restrain  the  officers  from  com- 
mitting a  breach  of  trust,  or  the  corporation  itself  from  engag- 
ing in  ultra  vires  acts,  that  is,  acts  beyond  the  scope  of  the 
charter  powers.  While  the  majority  rule,  they  must  rule  within 
the  limits  of  the  charter  powers,  and  if  they  exceed  these,  or  if 
their  acts  are  fraudulent,  the  minority  may  obtain  an  injunction. 

153.  Liability  of  stockholders.  Stockholders  are  liable  to  the 
corporation  for  any  unpaid  portion  of  their  subscriptions.  This 
liability  is  enforced  by  an  action  at  law,  like  any  action  to  collect 
a  debt. 

Stockholders  are  not  liable  to  creditors  of  the  corporation 
unless  the  statute  or  charter  provides  for  some  personal  liability. 
But  creditors  may  compel  original  stockholders  who  have  paid 
to  the  corporation  less  than  par  value  for  the  stock  issued  to 
them  to  pay  the  balance  if  the  creditors  have  been  led  to  believe 
that  stockholders  were  paying  in  to  the  capital  stock  the  full 
par  value.  It  is  a  kind  of  fraud  on  creditors  for  a  corporation 
to  advertise  a  capital  stock  of  say  $100,000  fully  paid  in  when 
in  fact  it  issued  the  stock  at  forty  cents  on  the  dollar,  and  the 
capital  stock  is  therefore  only  $40,000.  So  also,  if  the  capital 
stock  is  fully  paid  in,  but  a  part  of  it  is  thereafter  returned  to 
stockholders  under  the  guise  of  dividends,  the  creditors  may 
compel  the  stockholders  to  refund  it  so  far  as  necessary  to  pay 
the  debts  of  the  corporation. 

If  the  statute  makes  stockholders  personally  liable  for  the 
debts  of  the  corporation,  or  liable  to  an  amount  specified,  as,  for 
example,  to  an  amount  equal  to  the  face  value  of  their  shares 
of  stock,  a  creditor  who  has  a  judgment  against  the  corporation 
which  he  cannot  satisfy  out  of  its  property  may  proceed  against 
stockholders  who  were  such  when  his  debt  was  contracted  or, 
as  in  some  jurisdictions,  when  his  action  was  begun. 

154.  Reports  of  corporations.  The  statutes  generally  provide 
that  a  stock  corporation  shall  make  an  annual  report  of  its  affairs 
and  file  the  same  in  some  public  office  where  any  person  may 


266  CORPORATIONS  [Ch.  XIII] 

inspect  it.  This  is  in  order  that  persons  who  may  wish  to  do 
business  with  the  corporation  may  ascertain  whether  it  is  in 
a  sound  and  solvent  condition.  The  report  usually  contains  a 
statement  as  to  the  amount  of  capital  stock,  the  amount  actually 
issued,  the  amount  of  the  debts,  and  the  amount  of  the  assets. 
The  statutes  quite  generally  make  directors  personally  liable  for 
debts  in  case  they  fail  to  file  such  a  report,  and  also  for  debts 
contracted  upon  the  faith  of  the  report  filed  in  case  it  is  false  in 
any  material  particular,  and  sometimes  for  damages  suffered  by 
persons  purchasing  stock  upon  the  faith  of  such  false  report. 

155.  Receivers  of  corporations.  When  a  corporation  becomes 
insolvent  the  court  may,  upon  the  petition  of  the  directors, 
bondholders,  or  general  creditors,  appoint  a  receiver  of  the 
property  and  assets  of  the  corporation.  A  receiver  may  also  be 
appointed  upon  the  petition  of  a  stockholder,  if  the  directors  are 
wasting  or  misapplying  the  funds  or  property.  A  receiver  is  an 
officer  of  the  court,  and  as  such  takes  entire  charge  of  all  the 
property  and  business  pending  a  dissolution  or  reorganization 
of  the  corporation.  The  property  until  final  decree  is  there- 
fore in  the  custody  of  the  court  appointing  the  receiver. 

A  "  receiver's  certificate  "  is  an  obligation  issued  by  a  receiver 
under  authority  of  the  court  for  the  purpose  of  raising  money 
to  carry  on  the  business  of  the  corporation  during  the  term  of 
the  receivership.  It  takes  precedence  over  all  other  obligations 
of  the  corporation,  even  its  first-mortgage  bonds. 

156.  Dissolution  of  corporations.  A  corporation  is  dissolved 
by  the  expiration  of  the  time  for  which  it  was  chartered. 

A  corporation  may  be  dissolved  by  the  decree  of  a  court  for 
various  causes,  among  which  may  be  mentioned  insolvency, 
nonuse  of  franchises,  abuse  of  charter  powers,  violation  of  law, 
and  other  fraudulent  or  illegal  acts.  The  directors  or  stock- 
holders may  also  apply  for  permission  to  surrender  the  charter 
whenever  they  deem  such  a  course  beneficial  to  the  interests 
of  the  stockholders. 

Upon  dissolution,  after  all  debts  and  claims  are  paid,  the 
remaining  assets  are  divided  among  the  stockholders  in  propor- 
tion to  their  holdings. 


REVIEW  QUESTIONS  267 


REVIEW  QUESTIONS 

Section  146.  Define  a  corporation.  What  is  meant  by  saying  it  is  a 
"  legal  entity  "  ?  What  are  public  corporations  ?  What  are  private  corpora- 
tions? What  two  main  classes  of  private  corporations?  Object  of  a  stock 
corporation  ? 

147.  How  is  a  corporation  created?  Explain  what  constitutes  the  char- 
ter where  a  corporation  is  formed  under  a  general  act.  Draw  articles  of 
association  to  incorporate  a  stock  company  to  quarry  and  sell  stone. 

148.  Who  are  members  of  a  stock  corporation  ?  How  does  membership 
change?    What  is  a  stock  certificate  ?    How  is  it  transferred  ? 

149.  Who  are  the  directors?  How  are  they  chosen?  What  is  cumula- 
tive voting  and  what  is  its  object?  What  are  the  powers  of  the  directors? 
What  is  their  duty  ? 

150.  How  are  corporate  officers  and  agents  appointed  ?  Which  officers 
are  entitled  to  compensation?  How  are  the  powers  of  officers  fixed? 
Define  the  powers  of  each.  What  is  the  ultimate  authority  in  a  corporation 
as  to  contracts  ? 

151.  Enumerate  the  powers  of  a  corporation.  How  much  real  estate 
may  it  hold?  May  it  become  a  partner?  What  business  may  it  conduct? 
What  are  ultra  vires  acts  ? 

152.  What  are  the  rights  of  stockholders?  How  many  votes  does  each 
stockholder  have?  What  are  dividends?  How  fixed?  What  are  profits? 
What  is  preferred  stock  ?  What  are  bonds  ?  When  may  a  stockholder 
seek  the  aid  of  a  court  to  protect  his  interests? 

153.  When  is  a  stockholder  liable  to  the  corporation?  When  is  he 
liable  to  creditors  of  the  corporation  in  the  absence  of  statutory  liability  ? 
What  is  statutory  liability? 

154.  What  reports  of  corporations  are  required?  What  do  they  con- 
tain ?  Where  are  they  filed  ?  What  is  the  effect  if  they  are  not  filed  or  are 
false  ? 

155.  Who  is  a  receiver?  Whose  agent  is  he?  What  are  receiver's  cer- 
tificates?   Are  they  more  or  less  valuable  than  bonds? 

156.  How  may  a  corporation  be  dissolved?  After  dissolution  what  is 
done  with  the  assets  ? 


PART  VI 

PROPERTY  IN   LAND  AND   MOVABLES 
CHAPTER  XIV 

REAL   PROPERTY 
I.  Estates  in  Real  Property 

157.  Meaning  of  the  term  "  property."  Property  may  be 
regarded  as  an  object,  or  as  a  right  or  estate  in  or  to  an  object. 
It  may  be  corporeal  or  incorporeal,  and  it  is  classified  as  real 
and  personal. 

I.  Property  as  an  object.  The  word  property  is  used  con- 
cretely to  designate  an  object  or  thing  (lands  or  chattels)  in 
which  one  may  have  a  proprietary  right ;  it  is  used  abstractly  to 
designate  the  right,  interest,  or  estate  one  has  in  such  an  object 
or  thing.  Property  in  the  legal  sense  is  the  right,  often  but 
not  always  exclusive,  to  possess,  enjoy,  and  dispose  of  lands 
and  chattels. 

As  an  object  of  ownership  property  falls  into  two  classes  : 
(i)  immovables  or  land  and  things  so  annexed  thereto  or 
connected  therewith  as  to  be  regarded  as  a  part  of  the  land  ; 
(2)  movables,  or  things  not  so  annexed  to  land  as  to  be  con- 
sidered a  part  thereof.  The  first  class  is  popularly  called  real 
property  and  the  second  personal  property;  but  in  the  view 
of  the  law  not  all  interests  in  land  are  real-property  interests. 
It  becomes  necessary,  therefore,  to  classify  the  interests  which 
one  may  have  in  land  into  real  estate,  or  real  property,  and 
personal  estate,  or  personal  property, 

269 


2yo  REAL  PROPERTY  [Ch.  XIV 

2.  Property  as  an  estate.  Real  estate,  or  real  property,  con- 
sists of  the  estate  in  land  known  as  a  freehold  estate  because 
it  was  that  by  which  the  freemen  held  lands  under  the  old 
feudal  system.  This  estate  is  either  an  estate  of  inheritance 
which  descends  to  one's  heirs,  or  a  life  estate  which  terminates 
with  the  life  of  the  possessor  of  it  or  the  life  of  some  other 
designated  person.  All  other  estates  in  land  are  personal  prop- 
erty and  are  known  as  estates  less  than  a  freehold  ;  they  con- 
sist of  estates  for  a  determinate  time,  as  a  leasehold  estate  for 
a  definite  period  of  years.  Mortgages  and  liens  on  land  are  also 
personal  estate. 

Real  property,  then,  includes  all  estates  in  land  except  lease- 
holds and  liens. 

Personal  property  includes  leasehold  estates  in  land,  liens 
upon  land,  and  all  interests  in  movables. 

The  terms  "real  property"  and  "personal  property"  are  derived  not 
from  the  nature  of  the  object  owned  but  from  the  forms  of  action  used 
by  one  who  had  been  deprived  of  possession.  If  one  could  recover  the 
thing  itself,  he  used  a  "  real  action  " ;  if  he  could  recover  only  the  money 
value  of  the  thing,  he  used  a  "  personal  action."  Hence  it  came  to  be 
said  that  a  thing  which  could  be  recovered  specifically  was  a  "  thing  real," 
or  "  real  property  "  ;  while  a  thing  which  could  not  be  so  recovered,  but 
only  damages  for  its  withholding,  was  a  "thing  personal,"  or  "personal 
property."  This  serves  to  explain  why  all  interests  in  land  are  not  real 
property.  These  forms  of  action  have  disappeared  but  the  names  remain 
to  puzzle  the  student. 

3.  Corporeal  and  incorporeal  property.  Property  may  be  corpo- 
real or  incorporeal.  Corporeal  property  is  tangible  and  material; 
incorporeal  property  is  intangible  and  ideal. 

Corporeal  real  property  consists  of  land  and  its  fixtures ; 
incorporeal  real  property  consists  of  certain  permanent  rights 
of  enjoyment  or  profit  in  another's  land,  as  a  right  of  way 
over  it. 

Corporeal  personal  property  consists  of  physical  movable 
articles;  incorporeal  personal  property  consists  of  rights  granted 
by  government,  as  a  patent  right  or  copyright,  and  of  rights  of 
action  against  another  (known  as  choses  in  action),  as  a  right 
to  a  debt  or  to  damages  for  a  breach  of  contract,  etc.    Stock, 


§•57]  ESTATES  271 

bonds,    negotiable   instruments,   and   the   like  are   incorporeal 
personal  property. 

4.  Lands,  tenements,  and  Jicrcditaments.  Real  property  is 
often  described  as  "  lands,  tenements,  and  hereditaments." 
These  terms  call  for  definition. 

(a)  Land  comprehends  the  soil  and  those  things  annexed  to  it  either  by 
nature  or  by  man,  such  as  waters,  trees,  ores,  houses,  fences,  etc.  The 
land  in  contemplation  of  law  extends  downward  to  the  center  of  the  earth 
and  upward  to  the  highest  heavens.  Thus,  one  owning  ten  acres  of  land 
would  have  his  possession  defined  by  a  pyramid  with  its  apex  at  the  center 
of  the  earth  and  with  its  sides  passing  through  his  boundaries  indefinitely 
into  space.  Any  one  breaking  into  this  pyramid  or  "  close  "  at  any  point  is 
said  to  be  a  trespasser. 

(b)  The  term  tenements  is  broader  than  the  term  land,  and  includes  not 
only  lands  but  also  whatever  else  could  be  held  under  feudal  tenure,  such 
as  easements  in  lands.  If  B  owns  tract  X  and  C  owns  tract  Y,  C  may 
acquire  for  the  benefit  of  tract  Y  a  right  of  way  over  tract  X.  C  therefore 
owns  lands  (tract  Y)  and  tenements  (right  of  way  over  tract  X).  The 
modern  use  of  the  term  "  tenement"  to  describe  a  building  rented  to  ten- 
ants is  to  be  distinguished  from  this  technical  meaning. 

(c)  The  word  hereditaments  is  the  broadest  of  all,  and  includes  whatever 
may  be  inherited  by  an  heir  from  an  ancestor.  It  includes  not  only  lands 
and  tenements  but  also  heirlooms,  such  as  an  historic  powderhorn,  family 
jewels,  etc.  Heirlooms,  while  common  in  England,  are  not  known  to  our 
law,  and  therefore  hereditaments  and  tenements  are  substantially  equivalent 
terms  in  the  United  States.  Corporeal  hereditaments  or  tenements  are 
things  material,  such  as  lands,  houses,  etc.;  incorporeal  hereditaments  or 
tenements  are  intangible  rights  arising  out  of  material  things,  such  as  the 
right  to  collect  rent  out  of  lands,  the  right  to  exercise  the  franchise  to  main- 
tain a  toll  bridge  or  a  ferry,  or  the  right  to  take  ore  out  of  another's  land. 

5 .  Practical  differences  bettveen  real  and  personal  property. 
These  practical  differences  once  existed,  and  unless  modified 
by  statute  still  exist  between  real  and  personal  property. 

(a)  On  the  death  of  an  owner  leaving  no  will,  real  property 
goes  to  his  heirs,  while  personal  property  goes  to  the  adminis- 
trator to  pay  debts  and  then  to  be  distributed  among  the  next 
of  kin.  The  next  of  kin  who  take  personalty  are  often  different 
from  the  heirs  who  take  realty,  but  modern  statutes  tend  to  make 
the  two  classes  identical.  So  also  statutes  often  give  the  realty 
as  well  as  the  personalty  into  the  hands  of  the  administrator. 


272 


REAL  PROPERTY  [Ch.  XIV 


(/;)  The  right  of  a  wife  to  an  estate  of  dower,  or  of  a  hus- 
band to  an  estate  by  the  curtesy,  exists  in  realty  but  not  in 
personalty. 

(c)  In  general,  more  formality  is  necessary  to  transfer  realty, 
as  a  deed,  while  personalty  may  be  transferred  merely  by 
delivery. 

(d)  The  law  of  the  place  where  realty  is  situated  governs 
rights  in  it,  while  rights  in  personalty  are  governed  by  the  law 
of  the  place  of  domicile  of  its  owner. 

(e)  In  general,  the  law  as  to  realty  is  technical,  derived  from 
feudal  times,  while  the  law  as  to  personalty  is  more  liberal  and 
modern. 

The  logical  distinction  is  between  movables  and  immovables.  This  dis- 
tinction exists  in  the  nature  of  things  ;  but  the  historical  distinction  based 
upon  estates  in  lands  is  fundamental  in  the  English  and  American  law. 

158.  Estates  in  land;  duration.  An  estate  is  the  interest  which 
one  has  in  real  property.  As  land  is  permanent  and  is  not  con- 
sumed or  diminished  in  the  ordinary  use  of  it,  there  may  be 
different  estates  in  the  same  parcel  of  land,  one  succeeding 
another  in  possession  and  enjoyment.  One  person  may  own  an 
estate  and  have  possession  and  enjoyment,  while  another  also 
owns  an  estate  but  his  possession  and  enjoyment  are  postponed 
until  the  termination  of  the  first  estate. 

Estates  in  land  are  first  of  all  divided  into  (i)  freehold 
estates  and  (2)  estates  less  than  freehold.  The  first  we  have 
seen  are  real  estate,  while  the  second  are  personal  estate  and 
are  often  called  "  chattels  real." 

1.  Freehold  estates.  A  freehold  estate  is  one  which  is  to 
endure  for  a  period  not  fixed  or  ascertained,  that  is,  either 
forever  or  for  a  life.  Freehold  estates  arc  therefore  of  two 
kinds  :  (a)  estates  of  inheritance,  also  called  estates  in  fee ; 
(b)  life  estates,  either  for  the  life  of  the  owner  or  for  the  life  of 
some  other  person. 

(a)  Estates  of  inheritance  or  estates  in  fee  are  of  two  classes  : 
first,  estates  in  fee-simple,  which  descend  to  one's  heirs  gener- 
ally, collateral  heirs  as  well  as  lineal  heirs ;  second,  estates  in 


§  158]  ESTATES  273 

fee-tail,  which  descend  only  to  one's  heirs  in  the  direct  line  and 
may  be  limited  to  particular  heirs,  as  male  heirs,  the  eldest 
male  heir,  etc.  Estates  in  fee-tail  have  been  abolished  or  modi- 
fied in  many  of  our  states.  The  estate  in  fee-simple  is  the 
usual  estate  of  inheritance  in  this  country.  In  order  to  create 
it  in  a  deed,  the  conveyance  at  common  law,  and  still  where 
not  changed  by  statute,  must  run  to  the  grantee  and  his  heirs, 
as  "  to  A.  B.  and  his  heirs."  If  it  runs  "  to  A.  B.,"  or  even  "  to 
A.B.  and  his  children,"  or  "to  A.  B.  forever,"  it  would  give  A.  B. 
only  a  life  estate.  This  technical  rule  has  been  quite  generally 
changed  by  statutes  which  provide  that  a  deed  "to  A.B."  shall 
carry  a  fee-simple  unless  a  contrary  intention  appears.  In  a 
will  the  use  of  the  word  "heirs"  is  not  necessary  to  carry  a  fee, 
if  it  appears  to  be  the  intent  of  the  testator  to  devise  a  fee. 

(b)  Life  estates  are  of  two  classes  :  first,  conventional  life 
estates,  or  those  created  by  deed  or  will ;  second,  legal  life 
estates,  or  those  created  by  law.  A  life  estate  of  the  first  class 
may  be  for  the  life  of  the  tenant  or  for  the  life  of  another  per- 
son {pur  autre  vie).  A  life  estate  of  the  second  class  may  be 
an  estate  of  dower  or  an  estate  by  the  curtesy.  An  estate  of 
dower  is  the  estate  which  a  surviving  wife  has  during  the  rest 
of  her  life  in  one  third  of  the  lands  and  tenements  of  which  her 
husband  was  seised  in  fee  during  the  marriage,  and  which  she 
has  not  released  by  joining  with  him  in  a  deed  of  conveyance 
or  otherwise.  Dower  has  been  abolished  in  some  states,  and 
the  widow  is  often  given  an  absolute  share  instead  of  a  life 
estate  in  a  third.  An  estate  by  the  curtesy  is  the  estate  which 
a  surviving  husband  has  during  the  rest  of  his  life  in  all  the 
lands  and  tenements  of  which  the  wife  was  seised  in  fee  during 
the  marriage,  provided  there  was  a  child  of  the  marriage  born 
alive  and  capable  of  inheriting,  although  the  child  may  have 
died  before  the  mother.  The  husband  may  release  this  right 
by  joining  with  the  wife  in  a  conveyance.  Curtesy  has  been 
abolished  or  modified  by  statute  in  many  states. 

A  liomestcad  estate  is  a  creation  of  statute,  and  consists  in  the  right  to 
enjoy  a  certain  specified  quantity  of  land  occupied  as  a  residence  free  from 
liability  for  debts.    It  is  not  strictly  an  estate,  but  a  right  of  exemption 


274  REAL  PROPERTY  [Ch.  XIV 

attached  to  an  estate.  It  extends  generally  to  the  head  of  a  family,  that 
is,  one  who  is  under  a  legal  or  moral  duty  to  support  those  living  with  him. 
The  amount  of  land  so  exempted  differs  in  different  states,  and  in  the  same 
state  more  is  allowed  in  the  country  than  in  a  city.  Some  states  fix  it  by 
area,  some  by  value,  and  some  by  both.  It  is  usually  provided  that  a  hus- 
band cannot  transfer  a  homestead  estate  without  his  wife's  consent.  On 
the  death  of  a  husband  the  wife  in  many  states  succeeds  to  the  homestead 
right,  or  even  children  during  their  minority.  These  statutes  vary  so  widely 
that  it  would  be  impossible  to  consider  them  here  in  detail. 

2.  Estates  less  than  a  freehold.  These  estates  are  also  called 
"leasehold  estates"  and  "chattels  real,"  and  are  for  a  fixed 
or  determinable  period  of  time.  They  are  of  four  classes, — 
(a)  estates  for  years,  (b)  tenancy  at  will,  (c)  tenancy  from  year  to 
year,  (d)  tenancy  by  sufferance. 

(a)  An  estate  for  years  is  an  estate  limited  for  a  certain  defi- 
nite time,  as  an  estate  for  one  month,  or  for  one  year,  or  for 
ten  years,  or  for  one  hundred  years.  It  is  usually  created  by  a 
lease,  and  hence  is  often  called  a  leasehold.  What  remains  in  the 
owner  is  called  a  reversion,  because  possession  reverts  to  him 
upon  the  termination  of  the  lease.  Leaseholds  are  considered 
under  the  subject  of  Landlord  and  Tenant  (see  sec.  175  post). 

(b)  A  tenancy  at  will  is  a  tenancy  which  may  be  terminated 
at  the  will  of  either  the  lessor  or  lessee.  These  are  not  favored 
in  the  law,  and  wherever  possible  a  tenancy  is  construed  as 
from  year  to  year  instead  of  at  will.  Some  statutes  require  a 
previous  notice  in  order  to  terminate  the  tenancy. 

(c)  A  tenancy  from  year  to  year  is  a  tenancy  for  one  week, 
month,  quarter,  or  year  certain,  continuing  for  a  successive 
similar  period  unless  due  notice  be  given  to  terminate  it  at  the 
end  of  the  first  or  any  subsequent  period.  In  case  of  a  tenancy 
for  a  year  continued  into  a  second  year,  notice  of  an  intent  of 
either  party  to  terminate  it  is  required.  The  statutes  fix  this; 
in  some  states  it  is  six  months,  in  others  three  months,  etc. 
In  case  of  a  tenancy  from  quarter  to  quarter,  month  to  month, 
or  week  to  week,  the  notice  must  usually  equal  the  period  in 
length,  being  a  quarter,  a  month,  or  a  week  respectively. 

(d)  A  tenancy  by  sufferance  is  a  tenancy  which  arises  when  a 
tenant  remains  in  possession  at  the  end  of  his  term  without 


8*59] 


ESTATES 


275 


the  landlord's  consent,  as  where  he  has  had  notice  to  quit.  If 
the  landlord  consents  to  the  holding  over,  the  tenancy  becomes 
one  from  year  to  year.  If  he  does  not  consent,  he  may  by 
proper  proceedings  have  the  tenant  removed  from  the  land. 
Most  states  now  have  statutes  forbidding  a  forcible  entry  by 
the  landlord. 

The  above  estates  may  be  thus  outlined  : 


'  Freehold 
estates 


Estates 


in 
land 


In  fee 

(inheritance) 


For  life 


Estates  less  than 
a  freehold,  or  « 
leaseholds 


Fee-simple 
Fee-tail 

'  Conventional 

For  one's  own  life 
For  the  life  of  another 
(pur  autre  vie) 
Legal 
Dower 
Curtesy 
Homestead 


'  For  years 
At  will 

From  year  to  year 
By  sufferance 

159.  Future  estates  in  land:  reversions  and  remainders.  When 
an  estate  for  life  or  for  years  is  created,  there  is  an  estate  in 
residue  to  commence  in  possession  when  the  life  estate  or 
estate  for  years  ends.  Such  an  estate  is  either  a  reversion  or 
a  remainder. 

1.  Reversions.  A  reversion  is  the  residue  left  in  the  grantor 
or  his  heirs  after  the  granting  of  the  lesser  estate.  It  com- 
mences in  enjoyment  only  when  the  lesser  estate  is  ended. 
Meanwhile  it  can  be  freely  disposed  of  and  other  lesser  estates 
may  be  carved  out  of  it. 

Examples :  1.  R  leases  land  to  T  for  ten  years.  R  has  a  reversion  in 
the  land  to  commence  in  possession  when  T's  leasehold  expires. 

2.  R  afterwards  grants  L  a  life  estate  in  the  land.  R  now  has  a  rever- 
sion to  commence  in  possession  when  both  T's  and  L's  estates  are  at  an 
end.  L's  estate  for  life  is  subject  to  T's  leasehold,  and  can  commence  in 
possession  only  when  T's  estate  is  ended.  Should  L  die  before  T's  tenancy 
expires,  the  life  estate  would  be  of  no  value. 

3.  R  may  sell  his  reversion  and  the  grantee  will  get  the  same  rights  R 
had.    So  also  L  and  T  may  sell  their  estates. 


2y6  REAL  PROPERTY  [Ch.  XIV 

2.  Remainders.  A  remainder  is  an  estate  granted  to  take 
effect  in  possession  at  the  termination  of  another  estate  created 
by  the  same  instrument.  The  other  estate  must  be  less  than 
a  fee-simple,  for  nothing  remains  to  be  granted  after  a  fee- 
simple.  A  remainder  is  vested  if  the  person  who  is  to  have  it 
is  in  being  and  ascertained;  it  is  contingent  if  the  person  is 
not  in  being  or  is  uncertain,  but  it  becomes  vested  when  such 
person  is  ascertained.  A  vested  remainder  may  be  transferred, 
and  if  not  transferred  it  will  pass  to  the  heir  of  the  remainder- 
man upon  the  death  of  the  latter. 

Examples :  i .  X  grants  by  deed  a  life  estate  to  L  and  a  remainder  in 
fee  to  R.    R  has  a  vested  remainder,  and  may  sell  or  otherwise  dispose  of  it. 

2.  X  grants  by  deed  a  life  estate  to  L  with  a  remainder  for  life  to  M 
and  the  remainder  in  fee  to  R.  Here  M  has  a  remainder  for  life  after  L's 
death,  and  R  a  remainder  in  fee  to  be  enjoyed  in  possession  after  the 
death  of  both  L  and  M. 

3.  X  grants  a  life  estate  to  L  with  the  remainder  in  fee  to  L's  eldest 
son.  L  has  no  son.  The  remainder  is  contingent.  If  a  son  be  born  to  L, 
the  remainder  is  then  vested  in  the  son. 

4.  X  grants  a  life  estate  to  L  with  the  remainder  to  L's  eldest  son  living 
at  L's  death.  The  remainder  is  contingent  and  cannot  become  vested  until 
L's  death,  and  then  only  if  there  be  a  son  of  L  then  living.  Should  there 
be  none,  the  estate  would  revert  to  X  or  his  heirs. 

A  grant  to  L  for  life  with  a  remainder  in  fee  "  to  his  heirs  "  was  con- 
strued at  common  law  to  give  a  fee  to  L.  This  is  known  as  the  "rule  in 
Shelley's  case."  This  technical  rule  has  been  abolished  by  statute  in  many 
states,  but  as  it  remains  in  some  it  is  undesirable  to  use  that  phrase  to 
describe  the  remainder-men. 

160.  Estates  held  jointly  or  in  common.  Any  estate  in  land 
may  be  owned  by  one  person  in  severalty  or  by  two  or  more 
concurrently.  The  two  principal  concurrent  estates  are  known 
as  a  joint  tenancy  and  a  tenancy  in  common. 

Joint  tenancy.  When  two  or  more  persons  were  granted 
an  estate  together  by  the  same  instrument,  the  common  law 
construed  the  estate  to  be  one  in  joint  tenancy  unless  the  lan- 
guage showed  some  different  intent.  The  characteristic  of  the 
estate  was  that  if  one  of  the  persons  died  the  survivors  took  his 
share  to  the  exclusion  of  his  heirs  or  devisees.  Many  statutes 
now  provide  that  such  an  estate  shall  be  a  tenancy  in  common. 


§  i6o]  ESTATES  277 

Example.  X  devised  by  will  his  farm  to  his  three  sons,  A,  B,  and  C. 
This  was  a  joint  tenancy.  If  A  died,  B  and  C  owned  the  farm.  If  B  then 
died,  C  owned  it  in  severalty.  But  if  A  conveyed  his  interest  to  D,  the 
joint  tenancy  was  destroyed  and  it  became  a  tenancy  in  common  by  B,  C, 
and  D.  (A  devise  or  grant  to  A,  B,  and  C  would  now  in  many  states  be 
held  to  create  a  tenancy  in  common.)- 

Tenancy  in  common.  When  two  or  more  persons  hold  un- 
divided interests  in  land  under  separate  instruments,  or  under 
an  instrument  which  shows  an  intent  that  each  shall  hold 
his  interest  as  a  separate  or  individual  one,  there  is  a  ten- 
ancy in  common  ;  and  statutes  now  generally  provide  that  all 
conveyances  or  devises  to  two  or  more  shall  be  deemed  to  be 
tenancies  in  common  unless  expressed  to  be  joint  tenancies, 
and  that  heirs  shall  take  as  tenants  in  common.  The  charac- 
teristic is  that  on  the  death  of  a  tenant  in  common  his  share 
goes  to  his  heirs  or  devisees.  The  tenancy  may  be  ended  by  a 
partition  of  the  estate. 

Example.  X  devises  his  farm  to  A,  B,  and  C  as  tenants  in  common. 
Each  owns  an  undivided  one  third.  On  the  death  of  one  his  part  will  go 
to  his  heirs.  They  may  partition  the  farm  so  that  each  will  get  a  definite 
portion  of  it  in  severalty.  Should  A  purchase  B's  and  C's  portions,  A  would 
own  the  whole  farm  in  severalty. 

Partnership  real  estate.  As  a  partnership  is  not  a  legal  entity  it  can- 
not take  title  to  real  estate,  and  a  conveyance  to  the  partnership  would 
be  ineffective  for  want  of  a  grantee.  The  title  is  conveyed  to  the  partners 
individually,  and  they  become  tenants  in  common,  but  hold  the  property 
subject  to  partnership  debts  and  to  the  final  accounting  among  themselves. 
Upon  the  death  of  a  partner,  title  to  his  share  in  the  realty  goes  to  his 
heirs,  but  they  hold  it  practically  in  trust  for  the  partnership  business  until 
that  is  wound  up. 

Tenancy  by  entireties.  When  an  instrument  conveys  lands  to  two  per- 
sons who  arc  husband  and  wife,  they  take  an  estate  by  the  entireties. 
The  characteristic  is  that  whichever  survives  gets  the  whole  estate,  and 
this  result  cannot  be  defeated  by  a  prior  conveyance  by  the  deceased 
party.    This  estate  has  been  somewhat  modified  by  statute. 

Community  property.  In  Arizona,  California,  Idaho,  Louisiana,  Nevada, 
New  Mexico,  Texas,  and  Washington,  whatever  is  acquired  by  the  labor 
or  efforts  of  either  a  husband  or  his  wife  after  the  marriage  belongs 
one  half  to  each.  This  does  not  include  property  owned  at  the  time  of 
the  marriage,   or   property  received  by  way  of   gift,   devise,  or  descent 


278  REAL  PROPERTY  [Ch.  XIV 

This  idea  came  through  the  civil  (modern  Roman)  law  at  a  time  when 
the  Spanish  or  the  French  owned  the  territory  from  which  these  states 
were  carved. 

161.  Equitable  estates :  trusts.  It  is  also  possible  to  divide 
the  estates  in  land  so  that  one  person  has  the  recognized  estate 
and  title  in  a  law  court  and  another  person  in  an  equity  court, 
and  thus  create  what  are  known  as  trusts.  A  trust  is  the  obli- 
gation enforced  in  an  equity  court  against  the  holder  of  the 
legal  title  to  property  (the  trustee)  to  account  to  another  person 
(the  beneficiary)  for  the  income  and  profits  of  the  property. 

Example  1 .  X  devises  lands  to  T  to  receive  the  rents  and  income  and 
pay  the  same  to  B  during  B's  life,  and  then  to  convey  to  C.  T  has  the 
legal  title  in  fee-simple.  B  has  an  equitable  life  estate  and  C  has  an  equi- 
table fee  in  remainder.  No  one  could  disturb  T's  title  in  a  law  court; 
but  in  an  equity  court  B  and  C  may  compel  him  to  perform  the  trust. 
When  B  dies  there  must  be  a  conveyance  to  C,  who  will  then  have  the 
legal  title. 

A  charitable  trust  is  one  created  for  the  benefit  of  the  pub- 
lic or  of  an  indefinite  number  of  persons  constituting  a  class  of 
the  public.  Such  trusts  are  enforced  by  a  public  officer,  usually 
the  attorney-general  of  a  state. 

Example  2.  X  conveys  land  or  other  property  to  T  (and  his  successors 
to  be  named  by  the  court),  to  receive  the  rents  and  profits  and  apply  the 
same  to  the  relief  of  the  poor  of  the  city  of  A,  or  to  the  maintenance  of  a 
school,  or  to  maintain  a  public  park,  etc. 


II.   Land:  its  Constituents,   Growths,  and  Fixtures 

162.  Extent  of  ownership:  soil,  air,  minerals,  waters.  When 
one  owns  land  he  controls  the  space  above  and  below  it.  If 
limbs  of  trees  project  into  the  air  above  his  land,  he  may  cut 
them  off  to  the  boundary  line.  If  roots  grow  into  his  soil  from 
an  adjoining  estate,  he  may  cut  them  off.  He  owns  all  the 
minerals  in  the  land,  including  mineral  oils  and  gases,  subject 
only  to  any  reserved  right  in  the  state.  In  England  all  gold 
and  silver  mines  belonged  at  common  law  to  the  king,  but  in 
this  country  such  rights  are  in  the  landowner.    Congress  has 


§i6j]  LAND  AND   FIXTURES  279 

provided  by  legislation  for  the  establishment  of  mining  claims 
in  public  lands. 

A  lode  or  vein  (a  line  of  metal  imbedded  in  quartz  or  rock)  may  be 
located  to  the  extent  of  1500  feet  in  the  direction  in  which  it  runs,  and  300 
feet  on  each  side.  A  placer  (ground  containing  mineral  in  earth,  sand,  or 
gravel  in  a  loose  state)  may  be  located  by  one  person  to  the  extent  of  20 
acres,  or  by  eight  persons  in  association  to  the  extent  of  160  acres.  The 
locator  of  a  claim  must  do  work  thereon  at  least  to  the  extent  of  $100  in 
each  year,  or  he  forfeits  his  claim. 

One  owns  the  waters  if  he  owns  the  land  under  them, 
except  that  in  flowing  streams  he  cannot  unreasonably  divert 
the  waters  to  the  damage  of  a  lower  owner.  If  he  owns  the 
waters,  he  owns  the  ice  formed  on  them.  Lands  under  navi- 
gable waters  generally  belong  to  the  state.  This  is  almost 
invariably  true  as  to  tide  waters,  but  states  differ  as  to  the 
ownership  of  the  lands  under  navigable  streams.  In  the  case 
of  lakes  the  larger  ones  generally  belong  to  the  state,  while 
smaller  ones  belong  to  private  persons.  If  one  owns  the  fee 
under  waters,  he  has  the  exclusive  right  to  fish  in  such  waters. 

163.  Vegetable  products.  Vegetable  products  are  divided  into 
two  classes. 

1.  Fructus  naturales.  Vegetable  products  that  are  not  the 
result  of  annual  labor  and  fertilizing  are  classed  as  perennials, 
or  fructus  naturales.  Such  are  trees,  bushes,  and  grasses. 
Some  perennials,  as  hops,  have  been  excluded  because  the  crop 
is  dependent  upon  annual  cultivation.  Fruit  upon  trees  and 
bushes  has  usually  been  included,  although  often  the  result  of 
annual  cultivation.  Fructus  naturales  are  regarded  as  a  part  of 
the  realty. 

2.  Fructus  industrials.  Vegetable  products  that  are  the 
result  of  annual  labor  and  fertilization  are  classed  as  fructus 
industrials,  or  emblements.  Such  are  grains,  vegetables,  and 
other  annual  crops.  These  are  regarded  as  personalty  and  not 
as  a  part  of  the  realty.  If  one  has  an  estate  of  uncertain  dura- 
tion, and  it  is  terminated  before  the  crops  he  has  planted  have 
ripened,  he  or  his  representatives  may  enter  and  cultivate  and 
gather  the  crops.    But  if  his  tenancy  is  for  a  definite  period,  he 


2 So  REAL  PROPERTY  [Ch.  XIV 

cannot  enter  after  the  tenancy  expires.  If  the  owner  of  a  fee 
dies  while  crops  are  ripening,  they  go  to  his  executor  and  not 
to  his  heir.  Growing  crops  are  personalty,  and  hence  a  sale 
of  them  falls  within  the  seventeenth  section  of  the  Statute  of 
Frauds,  while  a  sale  of  growing  perennials  falls  within  the  fourth 
section,  although  on  the  last  point  there  is  some  conflict  and 
confusion  in  the  decided  cases. 

3.  Border  trees.  A  tree  growing  on  the  boundary  line 
between  the  lands  of  different  owners  is  owned  by  them  as 
tenants  in  common.  Neither  can  lawfully  move  or  destroy  it 
as  a  whole ;  but  one  may  cut  the  branches  on  his  side  if  he 
does  not  injure  the  trunk.  If  the  trunk  is  wholly  on  one  side 
of  the  boundary,  the  tree  belongs  to  that  landowner ;  the  other 
landowner  may  cut  off  the  overhanging  branches  but  cannot 
appropriate  them  or  the  fruit  on  them. 

164.  Fixtures.  A  fixture  is  an  article  which,  originally  per- 
sonal property,  has  by  annexation  to  land  come  to  be  regarded 
as  realty.  It  is  often  a  nice  and  difficult  question  whether  or 
not  the  article  so  annexed  has  become  a  fixture  and  so  ceased 
to  be  personalty. 

This  question  often  arises  between  a  vendor  and  a  vendee  of  lands,  be- 
tween a  mortgagor  and  a  mortgagee  of  lands,  between  the  heir  or  devisee 
of  a  landholder  and  his  executor,  between  the  reversioner  or  remainder-man 
and  the  tenant  for  years  or  the  executor  of  a  tenant  for  life,  between  the 
mortgagee  of  the  owner's  lands  and  the  mortgagee  of  his  personalty,  be- 
tween the  landowner  and  a  judgment  creditor  who  levies  on  the  article  as 
personalty,  etc.  The  question  usually  is,  however,  whether  one  who  is 
taking  possession  of  the  land  may  hold  the  article  as  a  part  of  the  realty, 
or  whether  the  one  who  is  quitting  the  land,  or  his  representatives,  may 
sever  the  article  and  take  it  as  personalty. 

While  the  matter  is  a  complicated  and  tangled  one,  the  fol- 
lowing rules  will  serve  as  a  fairly  reliable  guide  through  the 
labyrinth. 

1.  In  order  to  be  in  any  event  classed  as  a  fixture  the  arti- 
cle must  be  physically  annexed  to  the  land  or  to  some  structure 
or  thing  itself  physically  annexed. 

Exceptions,  (a)  If  the  article  is  an  essential  part  of  an  annexed  article, 
it  may  be  a  fixture,  although  itself  a  movable,  as  an  adjunct  or  part  of  a 


§,64]  LAND  AND  FIXTURES  28 1 

machine,  or  the  keys  to  a  house,  (b)  If  the  article  is  of  great  weight  and  ' 
is  kept  in  place  by  gravity  without  actual  physical  attachment,  it  may 
be  a  fixture,  as  a  building,  or  a  machine,  or  a  colossal  statue.  (c)  If  the 
article  has  been  fitted  and  appropriated  to  a  purpose  which  when  carried 
out  would  make  it  a  fixture,  it  may  be  constructively  a  fixture,  as  fence  rails 
laid  along  a  line  for  a  fence  begun  but  not  yet  finished. 

2.  If  the  article  is  so  annexed  that  to  remove  it  would 
materially  injure  what  remains  or  destroy  the  article  itself,  it 
must  be  regarded  as  a  fixture  and  irremovable. 

Example  1.  Water  and  gas  pipes  built  into  a  house  are  so  annexed 
that  they  cannot  be  removed  without  tearing  out  floors  or  partitions.  But  if 
simply  attached  to  walls  or  floors  by  hooks,  they  might  be  removed  under 
3,  <?)■ 

3.  If  the  article  may  be  removed  without  injury  to  the  free- 
hold or  destruction  of  the  article  itself,  then  whether  it  is  or 
is  not  regarded  as  a  fixture  often  depends  upon  the  relation  of 
the  one  who  annexed  it  to  the  land. 

(a)  If  the  annexer  is  the  owner  in  fee  of  the  land,  and  the 
article  is  calculated  to  improve  the  land,  then  the  article 
becomes  a  fixture.  If  the  owner  sells  or  mortgages  the  land, 
the  fixture  goes  with  it.  If  the  owner  dies,  the  fixture  goes  to 
the  heir  or  devisee  and  not  to  the  executor.  Of  course  the  owner, 
while  he  is  owner,  may  sever  the  article  and  make  it  again  per- 
sonalty, or  he  may  by  express  stipulation  reserve  it  from  a  sale 
or  mortgage,  or  he  may  by  will  direct  it  to  be  severed  and 
treated  as  personalty. 

Example  2.  Buildings,  fences,  machinery  attached  to  a  structure, 
furnaces  and  steam-heating  apparatus,  bars  and  counters  in  business  struc- 
tures, bookcases  attached  to  the  walls,  paintings  on  canvas  cemented  to  the 
walls,  heavy  stone  statues,  and  the  like  have  all  been  held  to  be  fixtures. 
But  gas  fixtures,  such  as  chandeliers,  have  been  held  to  be  removable 
furniture. 

(b)  If  the  annexer  is  a  tenant  of  the  land,  and  the  annexation 
was  for  purposes  of  trade  or  domestic  convenience,  the  article 
may  be  removed  by  the  tenant  at  the  expiration  of  the  term. 
The  law  favors  the  tenant  in  adapting  the  land  and  structures 
to  the  use  to  which  he  wishes  to  put  them  during  the  tenancy, 


282  REAL  PROPERTY  [Ch.  XIV 

and  permits  him  to  remove  annexations  if  he  can  do  so  without 
too  serious  an  injury  to  what  remains.  He  must  exercise  this 
right  before  he  surrenders  possession.  If  he  renews  his  lease, 
he  should  in  the  new  lease  expressly  reserve  the  right  to  remove 
articles  annexed  under  the  former  lease  or,  according  to  some 
authorities,  he  abandons  them  as  fixtures. 

Example  3.  Buildings  not  let  into  the  soil,  engines,  boilers,  and  other 
machinery  of  trade,  counters,  cases  of  shelving  and  other  store  furniture, 
chairs  fastened  to  the  floor  of  a  theater,  gas  fixtures,  and  the  like  have  all 
been  held  to  be  removable  by  a  tenant.  The  limit  would  be  fixed  when  the 
removal  would  do  a  serious  injury  to  the  building  belonging  to  the  land- 
lord, and  upon  this  test  many  of  the  above  articles  have  been  held  to  be 
fixtures  even  as  between  landlord  and  tenant.  Moreover,  courts  differ  some- 
times even  upon  substantially  the  same  facts. 

III.   Relative  Rights  of  Adjoining  Owners 

165.  Fences:  cattle  trespass.  At  common  law  the  owner  of 
cattle  is  bound  to  fence  them  in  or  otherwise  restrain  them. 
The  owner  of  crops  is  not  bound  to  fence  against  trespassing 
cattle.  Statutes  have  in  many  states  changed  or  modified  these 
rules,  and  in  some  the  matter  is  left  to  local  authorities  to  regu- 
late. Very  generally,  however,  statutes  have  imposed  upon  rail- 
roads the  duty  of  fencing  their  property  so  as  to  avoid  injury  to 
trespassing  cattle. 

In  many  states  there  are  statutes  compelling  adjoining  own- 
ers to  maintain  a  partition  fence  at  their  joint  expense. 

166.  Air  and  waters  ;  support  of  land.  One  owner  is  not  per- 
mitted to  pollute  the  air  over  a  neighbor's  land  by  smoke,  dust, 
or  odors  in  a  manner  unreasonably  to  disturb  the  neighbor's 
enjoyment  of  his  property.  Neither  can  he  unreasonably  dis- 
turb it  by  noises  or  vibrations.  These  acts  constitute  a  nuisance 
for  which  damages  may  be  recovered  or  an  injunction  issued. 

One  owner  cannot  pollute  waters  flowing  from  his  land  to 
that  of  a  neighbor,  nor  unreasonably  divert  the  waters  or  appro- 
priate them. 

One  owner  cannot  remove  the  lateral  support  of  a  neighbor's 
land  by  digging  so  near  the  boundary  as  to  cause  the  neighbor's 


§§  i67, 168]  TRANSFERS  283 

land  to  cave  in.  This  does  not  extend  to  the  support  of  build- 
ings but  only  of  the  land  in  the  natural  condition.  But  one 
excavating  may  be  liable  for  negligence  or  for  want  of  notice 
if  another's  building  is  injured  thereby. 

167.  Easements.  An  casement  is  a  right  by  one  person  to 
do  or  to  compel  another  to  refrain  from  doing  some  act  on 
that  other's  land.  It  may  be  acquired  by  grant  or,  in  some 
cases,  by  prescription,  —  that  is,  by  the  adverse  use  of  the  right 
for  a  specified  period,  usually  twenty  years. 

One  cannot  by  prescription  acquire  a  right  to  have  light  and 
air  come  to  his  land  from  his  neighbor's  land,  but  he  may  by 
grant.  Thus,  A  buys  land  of  B,  and  the  latter  agrees  not  to 
build  nearer  the  line  than  twenty  feet.  This  gives  A  an  ease- 
ment to  that  extent  in  the  light  and  air  from  B's  land. 

One  may  by  prescription  or  by  grant  acquire  a  right  of  way 
over  another's  land.  If  one  sells  to  another  land  not  adjoining  a 
highway,  there  is  a  "way  of  necessity  "  over  the  seller's  remain- 
ing land  in  order  to  reach  the  highway. 

One  may  acquire  a  right  to  use  a  party  wall,  or  to  drain 
water,  or  to  take  water,  or  to  compel  another  to  maintain  a 
partition  fence,  and  the  like.    All  these  are  easements. 

A  highway  over  one's  land  is  an  easement  for  the  benefit  of 
the  public  generally,  who  acquire  thereby  a  right  to  pass  to  and 
fro.  Of  course  the  public  may,  and  sometimes  does,  own  the 
fee  also.  But  if  the  fee  remains  in  a  private  individual,  he  may 
use  it  for  any  purpose  not  inconsistent  with  the  right  of  the 
public.  He  is  entitled  to  the  vegetable  growth,  and  he  may 
forbid  others  to  cut  trees  or  grass,  or  pasture  cattle,  or  hunt 
or  fish  there. 

IV.  Transfer  of  Interests  in  Lands 

168.  Contract  of  sale.  A  contract  to  sell  lands  or  any  interest 
in  lands  must  be  in  writing  and  be  signed  by  the  party  to  be 
charged  (see  sec.  22).  While  the  writing  may  be  an  informal 
instrument  (a  memorandum),  it  is  usual  to  have  a  somewhat 
formal  one  setting  out  the  terms  of  the  agreement  in  full.  It 
should  be  signed  by  both  parties  in  order  that  both  may  be  held. 


284  REAL  PROPERTY  [Ch.  XIV] 

The  legal  title  does  not  pass  at  the  time  of  making  the  con- 
tract, as  it  does  in  the  case  of  the  sale  of  personal  property.  But 
equity  for  many  purposes  regards  the  title  as  having  passed  to 
the  vendee  from  the  time  the  contract  is  made,  although  pay- 
ment and  delivery  of  the  deed  are  postponed.  As  equity  re- 
gards the  vendee  as  the  true  owner,  it  will  compel  the  vendor 
to  execute  the  conveyance  by  what  is  known  as  specific 
performance  of  contract. 

Equity  regards  the  land  as  already  a  part  of  the  vendee's  realty,  so  that 
if  he  dies  his  heir  can  compel  his  executor  to  pay  for  it  out  of  the  person- 
alty, and  the  deed  from  the  vendor  will  be  made  to  the  heir ;  it  regards  the 
unpaid  purchase  price  as  a  part  of  the  vendor's  personalty,  and  the  money 
when  paid  will  go  to  the  vendor's  executor  in  case  the  vendor  has  died. 

Since  equity  regards  the  land  as  that  of  the  vendee  he  must  bear  the  loss 
if  buildings  burn,  and  cannot  escape  paying  the  purchase  price  on  that 
account.  But  at  law  the  risk  will  follow  the  legal  title  and  the  loss  from 
destruction  of  buildings  will  fall  on  the  vendor. 

169.  Conveyances.  Conveyances  of  interests  in  lands  other 
than  leases  are  by  deed.  Of  these  there  are  two  kinds,  — 
quitclaim  deeds  and  warranty  deeds. 

A  quitclaim  deed  conveys  whatever  title  the  grantor  may 
have,  and  throws  upon  the  grantee  the  risk  as  to  whether  there 
is  a  good  or  bad  title  or  no  title  at  all. 

A  warranty  deed  conveys  the  title  of  the  grantor,  and  he 
covenants  or  warrants  (a)  that  the  grantor  is  seised  of  the  lands 
and  has  the  right  to  convey  them  ;  (b)  that  they  are  unincum- 
bered unless  otherwise  stated ;  (c)  that  the  grantee  shall  have 
quiet  enjoyment,  that  is,  shall  not  be  evicted  by  any  superior 
title ;  (d)  that  the  grantor  will  warrant  and  defend  him  in 
this  ;  (e)  that  the  grantor  will  execute  any  further  instrument 
necessary  to  perfect  the  grantee's  title. 

Many  states  provide  by  statute  for  a  short  form  of  deed 
which  shall  be  deemed  to  carry  with  it  all  these  warranties. 

A  deed  must  be  signed  by  the  grantor  and,  unless  otherwise 
provided  by  statute,  must  be  sealed  ;  in  some  states  it  must 
also  be  witnessed.  In  order  to  be  recorded  it  must  be  acknowl- 
edged before  a  notary  or  other  authorized  official.    Recording 


Land  Contract 

$lrt!ClC£  Of  &0rCCniCnt,    Made  this.----T:.r'i.nt.h.-^-day  of—June. 

in  the  year  ( )ne  thousand  nine  hundred  and  ..two.— — — — 

■iDCttUCCn Edward  Baker 


of   the   city   of  Binghamton,    County   of  Broome,    State   of  New  York,. 


;llu{ Nelson    Hopkins 


•.of  the  first  part, 


of  the   City  of  Syracuse,    County   of  Onondaga,    State   of  New  York, 


of  the  second  part,  in  the  manner  following :  The  said  parties  have  and  hereby 
do  mutually  covenant  and  agree  as  follows  :  The  part  y  of  the  first  part  to  sell, 
and  the  party  of   the   second   part  to  purchase,   SUl   that    CfaCt   Or    PatCCl 

Of  LaMl,  situate  in  the.-—^-.^}M— —  .of B.iftgft3-."1.*0.". County  of 

B roc-mo an(j  State  of  New  York,  briefly  described  as  follows: 

Beginning  at   a  point   one  hundred    (100)    feet   east   of   the  northeasterly 
corner   of  Ashland  Avenue   and  Summer  Street,    on   the  northerly  line   of 
Summer  Street,    and   running   thence  northerly  and  parallel  with  Ashland 
Avenue   one  hundred  and   fifty    (150)    feet;    thence   easterly  and  parallel    _ 
with  Summer  Street   forty   (40)    feet;    thence   southerly  and  parallel  with 
Ashland  Avenue   one  hundred   and   fifty    ( 150)  .feet ;    thence [.westerly,  .along ._ 
the   northerly   line  of  Summer  Street   to   the  place   of  beginning,  _______ 


for  the  sum  of...fo.?ly^*ftP.u.?*nd Dollars 

($  lz.:99.9.:99rrrr),  which  sum  the  said  party  of  the  second  part  hereby  agree  s 

to  pay  to  the  party   of   the    first    part  as   follows  :... ?.}.*.. thousand dollars 

($6,000.00)    on   the   first   day   of  July,    1902,    and   six   thousand  dollars 

($6,000.00)    on   the   first  day  of  January,    1903. _____ __ 

Said  part  y  of  the  second  part  also  agree  s  to  pay  ALL  taxes  and  assessments 
which  shall  be  taxed  or  assessed  upon  said  premises  from  the  date  hereof  until 
the  said  sum  shall  be  fully  paid  as  aforesaid. 

And  the  said  part  y  of  the  first  part,  on  receiving  such  payment 

at  the  time  and  in  the  manner  above 


mentioned,  shall,  at ft.1.3 own  proper  cost  and  expense,  execute  and 

deliver  to  the  said  part  y    of   the  second  part,  or  to ft } ,3 assigns,  a 

warranty  deed,    for   the   conveying  and  assuring   to  him,    or   them,    the   fee 
simple  of  the   said  premises.  , ■ __________ 

It  is  agreed  that  the  part  y  of  the  second  part  shall  have  possession  of  said 
premises  from  and  after.. tft.e  ..n^st,  day  ^of.J^ly, .,  1902. 

And  it  is  agreed  that  the  stipulations  aforesaid  are  to  apply  to  and  bind  the 
heirs,  executors,  administrators  and  assigns  of  the  respective  parties. 

^Fll    Wit\K$$    WlyttCOf,    The  said  parties  have  hereunto  set  their 
hands  and  seals  the  day  and  year  first  above  written. 

3!n  presence  of  §^Md'...M^&...  '> 

jo-lwi  sftcyiAt-e, 

[Acknowledgment  by  both  parties  (see  p.  253).     The  contract  is  good  without  an  acknowledg- 
ment, but  could  not  be  recorded.] 

285 


286  REAL  PROPERTY  [Ch.  XIV] 

is  necessary  in  order  to  prevent  a  subsequent  sale  to  an  inno- 
cent purchaser.  The  deed  must  be  delivered  to  the  grantee ; 
usually  this  is  a  manual  delivery,  but  less  than  this  has  been 
held  to  be  sufficient  where  the  intention  was  clear.  A  delivery 
in  escrow  is  a  delivery  to  a  third  person  upon  condition  that 
the  deed  shall  not  take  effect  until  some  condition  is  fulfilled. 
An  agent  duly  authorized  by  power  of  attorney  may  execute  and 
deliver  a  deed  for  his  principal  (see  sec.  1 19). 

If  a  deed  is  made  by  a  married  man,  it  is  usual  to  have  his 
wife  join  in  it ;  otherwise,  should  she  survive  him,  she  could 
claim  her  right  of  dower  in  the  property  conveyed.  If  a  deed 
is  made  by  a  married  woman,  her  husband  should  join  in  it  in 
order  to  bar  his  possible  estate  by  the  curtesy.  If  property  is 
owned  jointly,  the  owners  may  convey  by  joining  in  one  deed. 

A  deed  consists  of  the  following  parts:  (1)  the  premises, 
containing  the  names  of  the  parties,  sometimes  the  date  though 
this  may  be  at  the  end,  a  statement  of  the  consideration  and  of 
its  payment,  the  words  of  conveyance,  and  the  description  of 
the  land ;  (2)  the  habendum  or  statement  of  the  estate  granted, 
beginning  often  but  not  always  with  the  words  "  To  have  and  to 
hold" ;  (3)  any  reservation  that  is  to  be  made  ;  (4)  the  covenants 
or  warranties  ;  (5)  the  conclusion,  containing  the  statement  that 
the  grantor  has  signed  and  sealed,  together  with  his  signature 
and  seal  and  the  signatures  of  the  witnesses,  if  any ;  (6)  the 
acknowledgment  before  a  notary  of  the  due  execution  of  the 
instrument. 

170.  Wills.  Property  may  be  transferred  by  will.  In  order 
that  a  will  shall  be  valid  it  must  be  signed  (in  some  states  sub- 
scribed) by  the  testator  and  his  signature  attested  by  two  or 
more  witnesses.  In  some  states  the  testator  must  actually 
sign  in  the  presence  of  the  witnesses  and  they  in  his  presence 
and  in  the  presence  of  each  other.  In  many  states  one  who  is 
named  as  a  beneficiary  in  the  will  and  also  signs  it  as  a  witness 
cannot  take  the  devise  or  bequest  ;  hence  it  is  important  that 
the  witnesses  should  not  be  interested  in  the  will. 

As  a  will  does  not  take  effect  until  the  death  of  a  testator,  a 
devise  or  bequest  lapses  if  the  donee  dies  before  the  testator, 


Warranty  Deed 

Cijts  3 nticnrure, 

Made  the fi.r.Bt day  of *?T.}} in  the  year  One  thousand 

nine  hundred  and...f!f.Y.e 

•jjcttuccn Char  le.9.  .Levvi.3  


?.f..*ke.City .?.?.. $?r.?:?y?.?.'... P.?}*.1}*:?..?.?.  Onondaga,    and  State   of  New  York, 
— of  the  first  part,  and 


.Walter   Cooke, 


0f..th?..sam9..P!a.c?.- of  the  second  part, 

B?ttuC66ftf),  That  the  said  party  of  the  first  part,  in  consideration  of  the  sum  of 
six    thousand   dollars- , 

($  6v0.°9.-.0.0.— -),  lawful  money  of  the  United  States,  paid  by  the  party  of  the 
second  part,  does  hereby  grant  and  release  unto  the  said/(zr^y  of  the  second 
part, ft* 3.  heirs  and  assigns  forever, 

811  that  Cract  or  parcel  of  lanii,  situate  in  the .9*te of 

Syracuse County  of Ononda-g,a and  State 

of  New  York  ..8i..t:V.a.te.\..^?'.i.n.g..and.  being  in  the   tenth  ward  of  the  city  of 
Syracuse,    and  known  as    lot  numbered   three  hundred   and   thirty    (330)    on  a 
''Map   of  Land   in   the   city  of  Syracuse   lying  between  Tenth  and  Twentieth 
Streets"  and   filed   in   the   County   Clerk's   office   of  Onondaga  County  on 
the   tenth  day  of  June,    1899,    bounded   and   described   as    follows,    viz.: 
Commencing   on   the   northwesterly  corner  of  Fir3t  Avenue   and  Thirteenth 
Street  and   running   thence  northerly  along   the  westerly  side   of  First 
Avenue   forty-three ...(43)    feet, .thence  westerly  and  parallel  with  Thir- 
teenth Street   eighty    (80)    feet  .thence   southerly  and  parallel  with  First 
Avenue   forty-three    (43)    feet   to   the  northerly  side   of  Thirteenth  Street, 
and .thence,  easterly  along   the   northerly  side   of  Thirteenth  Street   eighty 
(80)    feet   to   the   place   of  beginning.  

(L  OJJCthrt  with  the  appurtenances,  and  all  the  estate  and  rights  of  the  sz.\&  party 
of  the  first  part  in  and  to  said  premises.    9To  ]j)aut  antJ  to  |)0llJ  the  above  granted 

premises  unto  the  said  part  y    of  the  second  part, ])}.3. heirs  and 

assigns  forever. 

Slllll   the  said   Charles  lewis,    party   of   the   first   r"r*  . 
do  es    covenant  with  the  said  part  y    of  the  second  part  as  follows  : 

2S7 


JFirtft.  —  That  the  party   of  the  first  part ia seised  of  the  said 

premises  in  fee  simple,  and  ha  s    good  right  to  convey  the  same. 

^CCOiib.  —  That  the  party   of  the  second  part  shall  quietly  enjoy  the  said 
premises. 

(3EJ)itrj.  —  That  the  said  premises  are  free  from  incumbrances. 

fourth.  —  That  the  party    of  the  first  part  will  execute  or  procure  any  further 
necessary  assurance  of  the  title  of  said  premises. 

JfjfHh  That  the  said  Charles   Lewis,    party   of   the    first   part, 

will  forever  warrant  the  title  to  said  premises. 

^U  Witl\C$$  WiytVCOf,   The  said  party    of  the  first  part  has    here- 
unto setrr-r)}}.?..——./iatid    and  seal    the  day  and  year  first  above  written. 
f  n  presence  of  /n  r       t>  r       • 

$*yup  aw  mm^...&m&-.. 


&tatc  of  ifreu)  gorft, 

County  of 9n.0.n.daea. 

City.         of       Syracuse 


On  this ?}. T.3.^ clay  of AP.r.i.1 in  the  year  One  thousand 

nine  hundred  and. .f.i.ve. before  me,  the  subscriber,  personally 

appeared Charles  Lewi s 

to  me  personally  known  to  De  the  same  person  described  in  and  who  executed 
the  foregoing  instrument,  and     he acknowledged  to  me  that 

he     executed  the  same. 

(  NOTARY'S  "I  

I       SEAL       J  Notary  Public    for  Onondaga  County,    New  York. 


[A  quitclaim  deed  would  read  like  the  above  except  that  it  would  say  "  does  hereby 
remise,  release  and  forever  quitclaim  unto  the  said  party,"  and  would  omit  the  warranties. 
A  deed  may  be  a  gift,  that  is,  the  grantee  may  pay  nothing.  In  such  case  it  is  usual  to 
say  "  in  consideration  oi  one  dollar  to  me  in  hand  paid,  and  other  good  and  sufficient 
consideration."] 

288 


[§i7i]  TRANSFERS  289 

unless,  as  in  some  states,  the  statute  provides  who  shall  take  in 
that  event.  In  case  a  devise  of  land  lapses  by  the  death  of  the 
devisee  it  will  go  to  the  testator's  heirs,  unless  there  be  a  resid- 
uary devise  ("all  the  rest  of  my  property  to  -  ■"),  in  which 
case  in  most  states  it  will  pass  to  the  person  named  in  the 
residuary  clause,  but  in  some  it  will  even  then  go  to  the  heir. 
At  common  law  the  marriage  of  a  woman  after  making  her 
will  revokes  the  will ;  but  this  has  to  some  extent  been  changed 
by  statutes.  The  marriage  of  a  man  after  he  makes  his  will, 
followed  by  the  birth  of  a  child,  revokes  his  will ;  but  this  also 
has  been  in  some  states  modified  or  regulated  by  statute.  If  a 
child  is  born  after  the  will  of  a  married  man  or  woman  is  made, 
and  there  is  no  provision  in  the  will  for  such  after-born  child, 
most  states  provide  that  the  child  shall  take  what  would  have 
descended  to  him  had  the  parent  died  without  a  will. 

In  most  states  a  person  may  not  make  a  valid  will  of  real 
property  until  he  is  twenty-one.  This  is  also  frequently  so  as 
to  a  will  of  personalty,  but  some  states  permit  a  will  of  person- 
alty at  eighteen.  A  person  of  unsound  mind  cannot  make  a 
valid  will.  The  law  of  wills  is  so  much  a  matter  of  statute  that 
local  legislation  must  be  consulted  in  order  that  the  necessary 
formalities  may  be  observed  and  the  intention  of  the  testator 
consummated.  It  is  not  prudent  for  a  person  to  make  his  will 
without  good  legal  advice. 

171.  Descent  to  heirs.  If  an  owner  of  real  property  dies  with- 
out a  will,  the  real  estate  (that  is,  any  estate  of  inheritance) 
goes  to  the  persons  designated  by  law  as  his  heirs,  subject  to  the 
estate  of  dower  or  curtesy  in  a  surviving  wife  or  husband.  The 
statutes  provide  who  shall  be  deemed  heirs.  They  are  usually 
the  following :  first,  children  and  the  children  of  a  deceased 
child,  the  latter  taking  among  them  the  share  which  their 
parent  would  have  taken  had  he  lived  ;  second,  if  there  be  no 
lineal  descendant,  the  father  is  generally  named  as  the  heir; 
third,  if  there  be  none  of  the  above,  the  mother,  brothers, 
and  sisters,  and  descendants  of  deceased  brothers  and  sisters  ; 
fourth,  failing  these,  the  land  goes  to  collateral  relatives  begin- 
ning; with  the  uncles  and  aunts  on  the  father's  side  and  their 


Will 

/,  James  Brown,  of  the  City  of  Ithaca  in  the  County  of  Tompkins  and  State 
of  New  York,  being  of  sound  mind  and  memory,  do  make,  publish  and  declare 
this  my  last  Will  and  Testament,  in  manner  following,  that  is  to  say: 

First.  —  /  direct  that  all  my  just  debts  and  funeral  expenses  be  paid. 

Second.  —  /  give  and  bequeath  to  my  son,  William  Brown,  five  thousand* 
dollars  ($5,000.00). 

Third.  —  /  give  and  bequeath  to  the  Home  Orphan  Asylum  of  New  York 
city  three  thousand  dollars  ($J,OOO.od). 

Fourth.  —  I  give,  devise  and  bequeath  to  my  daughter,  Mary  Brown,  my 
farm  in  the  town  of  Dryden,  county  of  Tompkins,  state  of  New  York,  known 
as  "  Oakdale,"  for  and  during  the  term  of  her  natural  life,  and  after  her 
death  to  her  lawful  issue  her  surviving. 

Fifth.  —  I  give,  devise  and  bequeath  to  my  wife,  Elizabeth  Brown,  all 
the  rest,  residue  and  remainder  of  my  estate,  both  real  and  personal,  in  lieu  of 
her  right  of  dozver. 

Lastly,  I  hereby  appoint  Henry  Wilson  executor  of  this  my  last  Will  and 
Testament:   hereby  revoking  all  former  wills  by  me  made. 

In  Witness  Whereof,  I  have  hereunto  subscribed  my  name  the  tenth  day  of 
June,  in  the  year  of  our  Lord  one  thousand  nine  hundred  and  four. 

We  whose  names  are  hereto  subscribed  do  certify  that  on  the  ioth  day  of 
June,  1004,  James  Brown,  the  testator,  subscribed  his  name  to  this  instrume?it 
in  our  presence  and  in  the  presence  of  each  of  us,  and  at  the  same  time,  in  our 
presence  and  hearing,  declared  the  same  to  be  his  last  Will  and  Testament, 
and  requested  us,  and  each  of  us,  to  sign  our  names  thereto  as  witnesses  to  the 
execution  thereof,  which  we  hereby  do  in  the  presence  of  the  testator  and  of 
each  other,  on  the  said  date,  and  write  opposite  our  names  our  respective  places 
of  residence. 

$£Ayui&  JtrawicUcyyi  residing  at  Jt/ia&a,,  crf&w-  tjo-x  k. 

(HhcvvC&Q,  (ocUif-cuvcU  residing  at  Jt/ia.<ui<,  cA&w-  Ifcyvk,. 


29c 


[§§172,173]  MORTGAGES  AND  LIENS  291 

descendants.    There  are  many  variations  in  the  statutes,  and 
only  a  general  notion  of  them  can  be  here  given. 

If  an  owner  of  personal  property,  including  leasehold  estates 
in  land,  dies  without  a  will,  the  property  goes  to  his  adminis- 
trator to  pay  debts,  and  is  then  distributed  among  the  persons 
designated  by  statute  as  next  of  kin.  These  statutes  are  much 
like  those  defining  heirs,  except  that  a  widow  is  usually  given 
a  considerable  portion  of  the  personalty  absolutely,  say  one  third 
if  there  be  children,  and  one  half,  or  often  more,  if  there  be  no 
children  or  grandchildren. 

172.  Adverse  possession.  One  may  lose  and  another  gain  title 
to  real  property  by  adverse  possession.  This  is  an  open,  exclu- 
sive, and  continuous  possession  hostile  to  the  true  owner  for  a 
period  of  time,  usually  twenty  years,  which  by  statute  bars  the 
right  of  the  true  owner  to  bring  an  action  to  recover  the  posses- 
sion. Residing  on  the  land,  cultivating  it,  or  fencing  it  may 
be  enough  to  show  adverse  possession.  A  tenant  or  other  person 
holding  under  the  owner  could  not  get  adverse  possession. 

V.   Mortgages  and  Liens 

173.  Mortgages  of  real  property.  A  mortgage  is  in  form  a 
conveyance  of  the  title  to  lands,  with  a  defeasance  clause  stating 
that  in  case  the  mortgagor  pays  to  the  mortgagee  a  certain  sum 
to  secure  which  the  mortgage  is  given,  the  conveyance  shall  be 
null  and  of  no  effect.  It  is  a  form  of  giving  security  for  a  debt 
by  creating  a  lien  on  land,  and  is  executed,  acknowledged,  and 
recorded  like  a  deed.  If  it  is  not  recorded,  a  subsequent  mort- 
gage taken  without  notice  of  the  first  and  duly  recorded  would 
take  precedence,  or  one  purchasing  the  land  without  knowledge 
of  the  mortgage  would  get  the  land  free  from  the  lien. 

The  debt  to  secure  which  the  mortgage  is  given  is  usually 
evidenced  by  a  note  or  bond.  The  debt  and  the  mortgage  which 
secures  it  may  be  assigned.  The  assignment  is  formally  executed 
and  also  recorded. 

When  the  mortgage  is  paid  a  formal  discharge  or  satisfaction  is 
executed  by  the  mortgagee  or  his  assignee,  and  is  also  recorded. 


Mortgage 


Cijts  3 ntienture. 


Made  the $il** .day  of. 9?.Ji?^ST. in  the  year  One  thousand 

nine  hundred  and  °.ne 

33 CtiU ittl  - Thoma.s    Powe r s 

of  the   City  of  Rochester,    County  of  Monroe,    and  State   of  New  York,    _ 

party    of  the  first  part,  and ?.e°r;g9..riait.?tl 

P.f...^he...s.amP...PAr:c.e.'. ./>art  y   of  the  second  part. 

^I)CrC<16,    the  said Th°ma9...pPwe.r.9 

i }.?.. justly  indebted  to  the 


saidparty   of  the  second  part  in  the  sum  of 3.i*J.hP.u.3ar?d. Dollars 

($$.\?.99.:9.?..wrrr.),  lawful  money  of  the   United   States,  secured  to  be  paid  by 

hi.3.. .certain  bond  or  obligation,  bearing  even  date  herewith,  conditioned  for 

the  payment  of  the  said  sum  of..8.**  ■*h.ou3a.n.4 Dollars 

/a  6,000.00  — —  )   on   the   first  day  of  November,    nineteen  hundred  and 

three,    and  the   interest   thereon,    to  be  computed  from 

rate   of  five  per   centum  per  annum,    and   to  be  paid  semiannually  on   the 

third  days   of  April  and  October   in  each .and every  year  until  ..the  .whole... 
of  said  principal   sum  be   fully  paid,    with   the  privilege   to   the   party  of 
the   fir9t  part,    his   executor,    administrator  or   assigns,    on   any.daywhen, 
interest   is   payable,    to    pay  off  the  principal   of _said  mortgage ..  in.sums.^ 
of   one   thousand  dollars   or  more. 

jftotO  t\)l&  ^n^tntViXt  Witnt&&tt]),  That  the  said  part  y  of  the  first  part, 
for  the  better  securing  the  payment  of  the  said  sum  of  money  mentioned  in  the 
condition  of  the  said  bond  or  obligation,  with  interest  thereon,  and  also  for  and 
in  consideration  of  one  dollar  paid  by  the  said  part  y  of  the  second  part,  the 
receipt  whereof  is  hereby  acknowledged,  do  es  hereby  grant  and  release  unto 
the  part  y  of  the  second  part,  and  to... hA?.... heirs  (or  successors)  and  assigns 
forever, 

ail  that  Cract  or  Parcel  of  lanti,  situate  in  the  r-^-r.?.ity..-^-— of 

.Rochester County  of.: M?.1?.1:.0.6. and  State 


of  New  York  hounded  and  described  as  follows,  viz ..J..  Beginning  at  a 
point  in  the  northerly  line  of  Forest :.  Avenue,  .three '..hundred  and  ..twenty- __ 
three  ( 323)  feet  easterly  from  the  easterly  line  of  Nor 
ning  thence  easterly  along  said  line  of Forest  Avenue  three  hundred  and_ 

seventy  (370)  feet;  thence  northerly ...two  hundred .  and  fifty:two  (252) 

feet;  thence  westerly  and  parallel  with .Forest  Avenue  three  hundred  and_ 

seventy  (370)  feet;  thence  southerly  two  hundred. and  fifty-        

feet  to  the  place  of  beginning. 


CogCtljer  with  the  appurtenances,  and  all  the  estate  and  rights  of  the 
part  y  of  the  first  part  in  and  to  said  premises. 

292 


Co  IbaDC  anU  to  jpolu"  the  above  granted  premises  unto  the  said  party  of 
the  second  part,  hi.3.. heirs  and  assigns  forever. 

|)rO\)rtjcU  3UtUaPS,  That  if  the  said  part  y  of  the  first  part,  .h.i£?..  heirs, 
executors  or  administrators,  shall  pay  unto  the  said  part  y  of  the  second  part, 
£A?..  executors,  administrators  or  assigns,  the  said  sum  of  money  mentioned 
in  the  condition  of  the  said  bond  or  obligation,  and  the  interest  thereon,  at 
the  time  and  in  the  manner  mentioned  in  the  said  condition,  then  these  presents, 
and  the  estate  hereby  granted,  shall  cease,  determine  and  be  void. 

Slltu"  the  said  part  y  of  the  fust  part  covenant  s  with  the  party  of  the  sec- 
ond part  as  follows  : 

That  the  part  y  of  the  first  part  will  pay  the  indebtedness  as  hereinbefore 
provided,  and  if  default  be  made  in  the  payment  of  any  part  thereof,  the  part  y 
of  the  second  part  shall  have  power  to  sell  the  premises  herein  described,  accord- 
ing to  law. 

3^11  W itllC33  3#I)CrC0f,  The  said  part  y  of  the  first  part  ha  b  here- 
unto set. J1.1.3.. hand     and  seal     the  day  and  year  first  above  written. 

Jn  presence  of  ...^4^M^....9?^.M^ ^C\ 

&tate  of  ificw  gotft, 


County  of Mo.P.r.°.e 

City         Qf        Rochester 

On   this  ____- third  ____  day   0f  ____  October  ____in    tne    year    One 

thousand  nine  hundred  and..°.ne before  me,  the  subscriber, 

personally  appeared T.hPm.a3..r'0.w.e.r.3 to  me  personally 

known  to  be  the  same  person     described  in   and  who    executed  the  foregoing 

instrument,  and     he:. acknowledged  to  me  that     he     executed 

the  same. 


(  NOTARY '  S  "I 
I       SEAL       J 


'wtst'U.     (p.      ^'/sefts/i'e'yid&vi 


Notary  Public   for  Monroe   County,    New  York. 


[If  Thomas  Powers  were  a  married  man,  it  would  be  unsafe  for  Hatch  to  take  the  mort- 
gage unless  the  wife  of  Powers  joined  in  it,  because  a  foreclosure  of  Powers'  interest  would 
not  affect  the  right  of  the  wife  to  dower  in  case  she  survived  her  husband.] 


=93 


Assignment  of  Mortgage 

Cl)i#  ^tt^ttUttltnt,   Made  this.^^..third^_  dayof__April.  __I903i 
-JSffvnrrn   George  Hatch,    of  the   City  of  Rochester,    County  of  Monroe,    and 

State   of, New  York, of  the  first  partj  an(j 

Albert  Jones,    of  the  City  of   Ithaca,    County  of  Tompkins,    and  State  of 
New, York, 0f  the  second  part, 

^itUC^Ctl),     That  the  party   of   the  first  part,  for  a  good  and  valuable 

consideration  to hAi? in  hand  paid  by  the  said  party    of   the  second 

part,  ha  s    sold,    assigned,    transferred    and    conveyed,    and    do  es     hereby    sell, 
assign,  transfer  and  convey  to  the  party  of  the  second  part  a  certain  mortgage 

bearing    date     the .tttttv^A T.1?. .ttt-- day    oirT7-77-.9.9^?.P.f.r.\.— —.190  1.     made    by 
Thomas   Powers t0  George  Hatch,    said  party  of  the 

first  part.. to  secUre  the  payment  of  the  sum  of..six..:thoua.f3:nd ■ 

Dollars  ($.P.:99.9.:9?.rrrr-),  and  interest  thereon  from  the  date  thereof, 


•.recorded  in  the  Clerk's  office  of Monr.0.e. 


County,  State  of  New  York,  in  Liber.— —  .■*?.?.. tttt. of  Mortgages,  at  pagerrrr.-'-.fl.'.Tr-r. 
on  the— —  .t.hi.rdTTT-7:day  of  — — :.°.ct.?.b.e.r.v.— —  190  I,  at  — -—.t!s0. .-—7.  o'clock 
P.  M.,  together  with  the  bond  accompanying  said  mortgage  and  therein  referred 
to,  and  all  sums  of  money  due  and  to  grow  due  thereon.     And  the  party  of  the 

first  part  hereby  covenant  3  that  there  is..1?.?™ due 

on  said  bond  and  mortgage  the  sum  of..fou.r..t.h.?H?.^.n.d..dol.lar3   ($4.00q.oo) . 

2Pn  Wlt\\C&$  WfyCtCQfy  The  said  party  of  the  first  part  haB  here- 
unto  set fi.A3. Jiand      and  seal      the  day  and  year  first  above  written. 

S^i^ap  Jfatsfv C\ 

O-s.] 


&tate  of  Jfieto  gorft, 

County  of M°.n.r°e. f-ss. 

c^?f         of       Rochester 

On    this foAr.d day   of AP.rA.A in  the    year  One   thousand 

nine  hundred  and  . fo.ree. before  me,  the  subscriber,  personally 

appeared Ge.P.rg.?.  .ffa.tctl to  me  personally  known  to 

be  the  same  person      described  in  and  who  executed  the  foregoing  instrument, 
and    he acknowledged  to  me  that    he     executed  the  same. 


J  NOTARY '  S  "I  SoA-M.       <T. 

\       SEAL   J 


■ez4d<£ 
Notary  Public  for  Monroe  County,  New  York. 
294 


Discharge  of  Mortgage 


State  of  New  York 
County  of  Tompkina 
City  of  Ithaca 


SS. 


I,    Albert   Jone9, 
of  New  York 


of   the   City  of   Ithaca,    County  of  Tompkins,    and   State 


2D0  i^)CrCtip  CCtttf|l,   That  a  certain  Indenture  of  Mortgage,  bearing  date 

the thAr? day  of. °.9.t.qb.e.r in  the  year  One  thousand 

nine  hundred  and.P".e made  and  executed  by.™?.?.a?..?0.w.er9.!..°f. 

the   first  part,    to   George  Hatch,    of   the   second  part,  _ 

and  recorded  in  the  office  of  the  Clerk  of  the  County 

of H°.n.r.oe..' State  of  New  York,   in   Liber 456 Qf 


Mortgages,    page— -7.  A4.1.  ■..-—.  on     the.— -  third—-  day    0f__  October ,___ 

tq01,  at   two        o'clock        p-  M.    wnicri  said  mortgage  was   duly   assigned 

to  me  by   the   said  George  Hatch,    the  mortgagee   above  named,    by  assignment 
dated   the   third  day  of  April,    1903,    and   recorded   in   the   Clerk's   office 
of  Monroe   County,    State   of   New  York,    in  Liber  460  of  Mortgages ,    at  page 
210,   on   the  third   day  of   April,    1903,    at    four   o'clock,    P.M., 


: is,  together  with  the 

bond secured  thereby,  fully  paid,  satisfied  and  discharged. 


Dated  the *.?£#} day  of 

February I90  5> 


/ ((SEALj 


&tate  of  jfrew  Boris, 

County  of .TomP.k.in9 

City         0f    ...Ithaca 


On  this t?.nth day  of Feb.ruary in  the  year  One  thousand 

nine  hundred  and..f.i.Y.e. before  me,  the  subscriber,  personally 

appeared Alber.t . J°.n.e 3. to  me  personally  known  to  be 

the  same  person       described  in  and  who  executed  the    foregoing   instrument, 
and     he acknowledged  to  me  that     he     executed  the  same. 


J  NOTARY  •  S  "1 
1   SEAL   J 


Notary  Public  for  Tompkins  County,  New  York. 
295 


296  REAL  PROPERTY  [Ch.  XIV 

If  the  mortgage  is  not  paid  when  due,  themortgageeor  assignee 
may  foreclose  it  and  sell  the  land  to  pay  the  debt,  interest,  and 
costs,  any  residue  above  this  going  to  the  mortgagor.  The  mort- 
gage may  give  a  power  of  sale  without  requiring  the  mortgagee 
to  resort  to  a  judicial  proceeding  for  foreclosure.  If  the  land 
does  not  sell  for  enough  to  pay  the  debt,  a  judgment  may  be 
had  against  the  mortgagor  for  the  deficiency  in  case  he  has  also 
given  a  note  or  bond  or  has  undertaken  a  personal  liability. 

174.  Liens  on  real  property.  In  some  states  an  unpaid  vendor 
of  land  has  a  lien  on  the  land  for  the  unpaid  purchase  money. 

In  many  states  one  who  makes  improvements  on  lands 
believing  them  to  be  his,  and  who  is  afterwards  ejected  by  one 
having  a  better  title,  is  allowed  a  lien  on  the  lands  for  the 
betterments. 

Statutes  often  provide  for  a  lien  in  favor  of  unpaid  mechanics 
who  have  performed  labor  upon  buildings,  or  in  favor  of  those 
who  have  furnished  material  for  them. 

A  judgment  against  a  person  rendered  in  a  federal  court  is 
a  lien  on  all  the  lands  of  the  judgment  debtor  situated  in  the 
state  in  which  it  is  rendered.  A  judgment  in  a  state  court  is  a 
lien  on  the  lands  of  the  judgment  debtor  situated  in  any  county 
of  that  state  in  which  such  judgment  is  docketed. 

In  most  states  taxes  on  a  particular  piece  of  land  constitute  a 
lien  on  the  land  until  paid. 

Before  purchasing  land  one  should  have  all  the  records  care- 
fully searched  in  order  to  ascertain  whether  the  vendor's  title 
is  good  and  whether  any  liens  are  recorded  against  the  prop- 
erty. An  abstract  of  title  is  usually  furnished  by  the  vendor 
showing  all  instruments  of  record  affecting  the  title ;  this 
should  be  examined  by  the  vendee's  attorney,  and  his  certificate 
that  it  discloses  a  good  title  should  be  attached. 

VI.   Landlord  and  Tenant 

175.  The  lease  and  its  covenants.  Estates  for  years  have 
already  been  explained  (see  sec.  158).  The  relation  of  landlord 
and  tenant  or  lessor  and  lessee  is  created  by  a  lease,   which 


§  i75]  LANDLORD  AND  TENANT  297 

conveys  an  estate  for  years  to  the  tenant  and  leaves  a  reversion 
in  the  landlord.  By  the  Statute  of  Frauds  all  leases  for  more 
than  a  specified  number  of  years  must  be  in  writing ;  in  many 
states  the  specification  is  three  years,  but  in  some  it  is  one 
year.    A  lease  need  not,  however,  be  under  seal. 

The  estate  in  the  lessee  is  not  created  until  he  enters  under 
the  lease,  — that  is,  he  could  not  bring  an  action  as  owner  of  an 
estate, — although  he  has,  of  course,  his  contract  right  against 
the  lessor  for  a  refusal  to  allow  him  to  take  possession,  and  is 
himself  liable  as  for  rent  if  he  refuses  to  enter.  When  he 
enters  he  has  thereafter  the  exclusive  right  to  possession  during 
the  life  of  the  lease,  and  may  maintain  an  action  against  any  one 
who  injures  the  property.  If  the  wrongdoer  also  injures  the 
reversion,  the  landlord  may  have  his  action  as  well. 

A  lease  is  in  form  a  conveyance  of  lands  for  a  term  of  years 
or  at  will,  in  consideration  of  a  return  of  rent  or  other  recom- 
pense. The  person  conveying  is  called  the  lessor,  and  the 
person  receiving  the  conveyance  is  called  the  lessee.  The  words 
of  conveyance  are  usually  "grant,"  "demise,"  "lease,"  "let," 
but  any  words  expressive  of  an  intention  to  transfer  possession 
are  sufficient. 

Any  express  covenant  upon  which  the  parties  agree  may  be 
inserted  in  a  lease.  Those  almost  always  present  are  the  lessee's 
covenant  to  pay  rent,  a  covenant  that  one  party  or  the  other 
will  pay  taxes  and  assessments,  and  the  lessee's  covenant  to 
surrender  the  premises  in  good  condition  at  the  end  of  the 
term.  Other  express  covenants  may  be  that  the  lessor  will 
repair  buildings  or  renew  the  lease,  or  that  the  lessee  will  repair, 
or  not  assign  or  sublet,  and  the  like.  Words  not  plainly  express- 
ive of  a  covenant  may  be  construed  to  indicate  an  intention 
to  make  one. 

The  implied  covenants  are  that  the  lessor  has  the  right  to 
make  the  lease  and  that  the  lessee  shall  have  quiet  enjoyment 
of  the  premises.  These  covenants  mean  that  the  lessee  shall 
not  be  disturbed  by  the  lessor  or  any  one  claiming  superior  title; 
the  lessor  does  not  warrant  the  lessee  against  the  acts  of  tres- 
passers or  other  wrongdoers. 


Lease 

a  ilease 

Made   and   executed    33cttUCCn J.0.ht?.R.i.ctiar.da. of 

the pity of B^avia, New  York,  of  the 

first  part,  and Hp.pry  Jackson of    the  _____  C i  ty  ____ 

of P.f.foy. i.a.'. New   York,   of   the   second   part, 

this fiF.?.y. day  of ¥.ay in  the  year  One 

thousand  nine  hundred  a n d . . ? .? H T.  • 

^H  COttSfttJCnitiOtt  of  the  rents  and  covenants  hereinafter  expressed,  the 
said  party  of  the  first  part  has  -DcmtficB  ailtt  LcafifU,  and  does  hereby  demise 

and  lease  to  the  said/ar^y  of    the  second  part 

the  following  premises,  viz. : 

a  dwelling  house   situated  on   the   east   side   of  Park  Street,    between  Allen 

Street   and  North  Street,    and  known  as   124  Park  Street,    Batayia,    New 

Yo rk with  the  privileges 

and  appurtenances,  for  and  during  the  term  of Pne.  .y  e.ar from 

the .f.ir.?.^ day  of May.\ 190  4,  which  term  will 

end  on  ■^■h.?..^.h.^.r.^.?.^.d.ay..9.f..AP.r.i.?-.;...]:r>.?A-. And  the  said 

part  y     of  the  second  part  covenant  s    that    he   will  pay  to  the  party  of  the  first 

part  for  the  use  of  said  premises,  the m.on.th. \?. rent  of 

forty Dollars  ($*9 -M  — ) ,  to  be  paid.!?.on.t.h.1y..iri... 

advance.  

&nlJ  ProtliTlrtJ,  said  part  y    of  the  second  part  shall  fail  to  pay  said  rent,  or 

any  part  thereof,  when  it  becomes  due 

it  is  agreed  that  said  party  of  the  first  part  may  sue  for  the  same,  or  reenter  said 
premises,  or  resort  to  any  legal  remedy. 

The  part  y    of  the .f.  \?.?.\ part  agrees    to   pay  all 

taxes  to  be  assessed  on  said  premises  during  said  term..e.xce.?.t...t:h.e..?va*e.r 

tax.  

The  part  y  of  the  second  part  covenant  3  that  at  the  expiration  of  said 
term  he  will  surrender  up  said  premises  to  the  party  of  the  first  part  in  as 
good  condition  as  now,  necessary  wear  and  damage  by  the  elements  excepted. 

TjJltWCpp  the  hands  and  seals  of  the  said  parties  the  day  and  year  first  above 
written. 

298 


[§i76]  LANDLORD  AND  TENANT  299 

176.  Defects,  repairs,  and  waste.  The  law  is  not  very  favor- 
able to  the  lessee  as  regards  defects,  repairs,  or  the  cutting  of 
timber  or  the  working  of  mines.  He  has  but  a  temporary  inter- 
est and  must  use  the  property  so  as  not  to  decrease  the  value 
of  the  reversion. 

1.  Defects.  Except  so  far  as  there  are  express  covenants  in 
the  lease  to  the  contrary,  the  lessee  takes  the  premises  in  the 
condition  in  which  they  are  when  the  lease  is  executed.  There 
is  no  implied  covenant  that  they  are  in  good  condition  or  fit 
for  occupation. 

There  are  two  exceptions  to  this  rule,  (a)  The  lessor  is  liable  if,  known 
to  him,  the  premises  contain  some  concealed  and  dangerous  defect  which 
the  tenant  could  not  observe  and  which  works  him  an  injury,  as,  if  the  con- 
cealed portions  of  a  building  be  dangerously  defective  or  if  the  building  has 
been  infected  with  the  germs  of  some  dangerous  disease.  (6)  In  England 
and  in  some  states  it  is  held  that  in  the  lease  of  a  furnished  house  there  is 
an  implied  covenant  or  condition  that  it  shall  be  habitable. 

2.  Repairs.  The  tenant  is  bound,  unless  otherwise  stipulated, 
to  make  repairs  to  an  extent  necessary  to  return  the  premises 
in  substantially  the  same  condition  as  when  he  received  them, 
ordinary  wear  and  tear  excepted.  To  this  end  he  is  entitled  to 
estovers,  that  is,  to  take  from  the  premises  timber  needed  for 
repairs.  The  common  law  compelled  him  to  restore  buildings 
destroyed  by  accident  or  fire,  but  in  many  states  this  harsh  rule 
has  been  changed. 

3.  Waste.  The  tenant  cannot  commit  waste,  that  is,  he  can- 
not cut  trees  (except  for  estovers  for  repairs  and  for  fuel),  tear 
down  buildings,  open  mines,  take  clay  or  sand,  or  otherwise 
substantially  injure  the  freehold.  He  may  work  mines  already 
opened  unless  restrained  by  his  lease.  A  tenant  committing 
waste  is  liable  in  treble  damages,  and  in  some  states  forfeits  his 
lease.  He  may  also  be  enjoined  by  an  equity  court  from  con- 
tinuing to  commit  waste. 

4.  Title.  The  tenant  cannot  deny  his  landlord's  title  while 
in  possession  under  the  lease.  It  would  be  a  fraud  on  the  land- 
lord for  a  tenant  to  get- possession  under  a  lease  and  then  set 
up  an  adverse  claim  to  the  premises. 


300  REAL  PROPERTY  jCh.  XIV 

177.  Assignment  and  subletting.  The  tenant  may,  unless  he 
has  contracted  not  to  do  so,  either  assign  his  whole  interest 
or  sublet  the  premises. 

i.  Assignment.  Unless  restrained  by  the  lease  the  tenant 
may  assign  his  estate.  If  he  assigns  it,  he  ceases  to  have  any 
estate,  although  he  remains  liable  for  the  rent  and  other  cov- 
enants unless  the  landlord  consents  to  the  assignment.  Such 
consent  may  be  gathered  from  the  acceptance  of  rent  from  the 
assignee.  The  law  may  work  an  assignment  by  the  sale  of  the 
tenant's  estate  for  debt  or  by  his  death.  As  an  estate  for  years 
is  personalty  it  passes  to  the  executor  of  the  deceased  tenant 
and  not  to  his  heir. 

2.  Subletting.  Unless  restrained  by  the  lease  the  tenant 
may  sublet  the  premises  or  any  part  of  them.  A  grant  of  the 
lessee's  whole  interest  is  an  assignment ;  a  grant  of  a  part  of 
his  interest  is  a  sublease.  If  he  has  an  estate  for  ten  years  and 
grants  one  for  eight,  or  if  he  grants  a  part  of  the  premises,  this 
constitutes  a  sublease.  It  has  been  held  that  granting  a  part 
of  the  premises  for  the  whole  unexpired  term  is  an  assignment 
as  to  that  part,  but  the  authorities  do  not  agree  as  co  this. 
A  sublessee  is  the  tenant  of  the  first  lessee,  not  of  the  land- 
lord. But  neither  an  assignee  nor  a  sublessee  while  in  posses- 
sion can  deny  the  landlord's  title. 

178.  Rent  and  remedies  for  nonpayment.  The  rent  reserved 
by  the  landlord  who  owns  a  fee  is  itself  real  property  until 
due  and  payable,  when  it  becomes  personalty.  Hence  all  rents 
due  at  the  death  of  the  owner  go  to  the  executor,  while  rents 
not  accrued  go  to  the  heir. 

The  remedies  of  the  landlord  when  the  tenant  fails  to  pay 
the  rent  are  (a)  an  action  in  debt  or  covenant  to  recover  the 
amount  due ;  (b)  reentry  on  the  premises  if  such  right  is 
reserved  in  the  lease  or  is  given  by  statute  ;  (c)  in  some  states 
a  lien  on  the  crops  grown  on  the  leased  premises. 

Many  states  forbid  by  statute  the  landlord  to  take  forcible 
possession  of  the  premises  in  case  the  tenant  is  delinquent,  and 
nearly  all  states  provide  a  summary  judicial  proceeding  for  the 
eviction  of  a  tenant  who  is  in  arrears. 


§i79]  LANDLORD  AND  TENANT  301 

179.  Termination  of  lease.    A  lease  is  terminated  as  follows  : 

(a)  when  the  time  fixed  in  it  expires  (as  to  tenants  at  will 
and  from  year  to  year,  see  sec.  158); 

(/;)  when  surrendered  by  voluntary  act  of  the  tenant  acqui- 
esced in  by  the  landlord; 

(c)  when  there  is  a  breach  of  the  tenant's  covenant,  which, 
by  the  terms  of  the  lease,  gives  the  landlord  a  right  to  terminate 
the  tenant's  estate  ; 

{d)  when  the  landlord's  title  is  extinguished,  as  when  a  life 
tenant  who  lets  the  premises  dies,  or  when  the  landlord  is  dis- 
possessed of  title  by  an  adverse  claimant ; 

(e)  by  statute  in  some  states,  when  the  buildings  on  the 
premises  are  destroyed  without  the  tenant's  fault ;  but  at  com- 
mon law  the  destruction  of  the  premises  will  not  terminate  the 
lease  except  where  the  tenant  has  hired  only  a  part  of  the 
building. 


REVIEW  QUESTIONS 

Section  157.  How  is  property  classified  when  considered  as  an  object  ? 
What  two  main  classes  in  the  law  ?  What  is  real  estate  ?  What  is  personal 
estate?  What  is  corporeal  real  property  and  what  incorporeal?  What 
is  corporeal  personal  property  and  what  incorporeal?  Define  land  ;  tene- 
ments ;  hereditaments.  What  practical  differences  exist  between  realty 
and  personalty  ? 

158.  How  are  estates  in  land  divided?  What  is  a  freehold  estate?  What 
two  classes  ?  Define  each.  How  is  each  divided  ?  Define  dower  ;  curtesy  ; 
homestead  estate.  What  four  classes  of  estates  less  than  a  freehold  ?  Define 
each. 

159.  What  is  a  future  estate?  What  is  a  reversion?  What  is  a 
remainder?     Illustrate. 

160.  What  is  a  joint  tenancy  and  how  created?  What  is  a  tenancy  in 
common?  Characteristics  of  each  ?  How  is  realty  held  by  a  partnership? 
What  is  a  tenancy  by  the  entireties  ?    What  is  community  property  ? 

161.  What  is  a  private  trust?  How  enforced?  What  is  a  charitable 
trust?    How  enforced?    Illustrate. 

162.  What  is  included  in  the  term  land  ?  What  may  one  do  with  over- 
hanging branches  ?    Explain  the  ownership  of  waters. 


3o2  REAL  PROPERTY  [Ch.xIV] 

163.  What  two  classes  of  vegetable  products  ?  Which  is  realty  ?  Which 
personalty  ?    Who  owns  a  border  tree  ? 

164.  What  is  a  fixture  ?  State  the  rules  to  determine  whether  an  article 
is  a  fixture.  What  is  meant  by  physical  annexation  ?  When  is  an  annexed 
article  clearly  a  fixture?  When  is  it  doubtful?  What  difference  does  it 
make  who  annexes  the  article?    What  may  a  tenant  remove? 

165.  What  is  the  common  law  as  to  cattle  trespass?  What  do  statutes 
provide  as  to  fences? 

166.  What  is  a  nuisance?    What  is  lateral  support  ? 

167.  What  is  an  easement  ?  How  may  it  be  acquired  ?  How  in  light  and 
air?  How  in  a  right  of  way?  What  is  a  way  of  necessity?  Explain  rights 
in  highways. 

168.  How  must  a  contract  to  sell  land  be  made  ?  When  does  title  pass? 
How  does  equity  regard  this?  Illustrate. 

169.  How  are  conveyances  of  land  made?  What  is  a  quitclaim  deed? 
What  is  a  warranty  deed  ?  What  are  the  warranties  ?  How  must  a  deed  be 
executed  ?  Is  delivery  necessary  ?  What  is  an  escrow  ?  What  are  the  parts 
of  a  deed  ? 

170.  How  must  a  will  be  executed  ?  Explain  who  should  not  be  witnesses, 
and  why.  If  a  devisee  dies  before  the  testator,  what  becomes  of  the  devise? 
What  effect  has  subsequent  marriage  on  a  will  ?    Who  may  make  a  will  ? 

171.  If  one  dies  without  a  will,  to  whom  does  his  realty  go?  his 
personalty  ? 

172.  Explain  title  by  adverse  possession. 

173.  What  is  a  mortgage?  How  is  it  executed?  Why  should  it  be 
recorded?  What  is  an  assignment?  What  is  a  discharge?  What  is  fore- 
closure ? 

174.  What  other  liens  besides  mortgages  may  be  created  upon  lands? 
When  is  a  judgment  a  lien?    What  is  an  abstract  of  title? 

175.  How  is  an  estate  for  years  created?  When  does  it  begin?  What 
is  the  form  of  a  lease  ?  What  express  covenants  may  it  contain  ?  What 
covenants  are  implied  ? 

176.  Who  takes  the  risk  as  to  defects  in  the  premises?  Exceptions? 
Who  must  make  repairs?  What  are  estovers?  What  is  waste?  What  is 
the  penalty  for  waste  ?    Why  can  the  tenant  not  deny  the  landlord's  title? 

177.  What  is  the  effect  of  an  assignment  of  a  lease?  When  will  it 
occur  ?  How  does  a  sublease  differ  from  an  assignment  ? 

178.  Is  rent  realty  or  personalty?  What  are  the  landlord's  remedies 
against  a  tenant  for  rent?    Is  forcible  entry  allowed? 

179.  How  is  a  lease  terminated? 


CHAPTER  XV 

PERSONAL   PROPERTY 

I.  Classification  :  Kinds  and  Estates 

180.  Classification.  Personal  property  consists  of  the  following: 

1.  Chattels  real,  that  is,  leasehold  interests  in  land  These 
have  already  been  considered. 

2.  Chattels  personal,  including  all  property  except  property 
in  land.    Chattels  personal  are  further  divided  into: 

(a)  Choses  (i.e.  things)  in  possession,  or  corporeal  personal 
property,  of  which  one  may  take  physical  possession  and  con- 
trol, like  coin,  cattle,  books,  etc. 

(b)  Choses  in  action,  or  incorporeal  personal  property,  that 
is,  a  legal  right  regarded  as  an  object,  as  a  right  to  sue  for  and 
recover  a  debt,  a  right  to  share  in  the  profits  of  a  corporation, 
the  right  to  a  patent,  copyright,  or  trademark.  Such  a  right 
may  be  evidenced  by  a  chose  in  possession,  as  where  a  debt  is 
evidenced  by  a  promissory  note,  an  interest  in  a  corporation 
by  a  share  of  stock,  or  a  monopoly  to  make  and  vend  an  article 
by  letters  patent.  In  such  case  the  paper  on  which  these  evi- 
dences are  inscribed  is  a  chose  in  possession,  but  the  right  is 
incorporeal  or  "in  action." 

Personal  property  may  become  real  property  by  being  annexed 
to  land  as  a  fixture.  This  has  already  been  discussed.  Real  prop- 
erty may  become  personal  by  being  severed  from  the  land,  as 
when  a  tree  is  felled,  or  minerals  are  dug,  or  buildings  pulled 
down.  Some  things  growing  upon  land  or  attached  to  it  are 
personalty,  as  growing  crops  or  articles  annexed,  but  not  fix- 
tures. A  few  movable  articles  are  realty,  as  the  keys  to  a  house, 
the  title  deeds  to  land,  or  separable  parts  of  a  machine  fixture. 

Of  the  various  kinds  of  personal  property  only  a  few  can 
here  be  considered. 

303 


304  PERSONAL  PROPERTY  [Ch.  XV 

181.  Property  in  animals.  Animals  are  either  domesticated 
or  wild.  In  the  former  the  owner  has  absolute  property.  In 
the  latter  one  may  have  a  qualified  property,  and  this  may  ripen 
into  an  absolute  property. 

i.  The  owner  of  the  land  upon  which  wild  animals  are,  has 
the  exclusive  right  to  hunt,  capture,  and  kill  them  while  they 
are  there.  Any  person  coming  on  his  land  for  such  a  purpose 
without  his  permission  is  a  trespasser  ;  if  such  trespasser  kills 
an  animal  there,  whether  it  belongs  to  him  or  to  the  landowner 
is  a  disputed  question. 

2.  One  who  captures  a  wild  animal  and  keeps  it  in  captivity 
has  the  exclusive  right  to  it  while  it  is  in  his  possession.  If  it 
acquires  the  habit  of  returning  after  wandering  at  large,  it  is 
still  his.  But  if  it  regains  its  natural  liberty  and  remains  at 
large,  it  is  no  longer  his,  and  belongs  to  any  one  who  captures 
or  kills  it.  A  mere  temporary  escape,  however,  may  not  amount 
to  regaining  its  natural  liberty,  as  where  a  canary  escapes  into 
the  street  or  an  animal  from  a  menagerie. 

3.  One  who  rightfully  kills  a  wild  animal  has  the  exclusive 
property  in  it. 

4.  One  who  keeps  a  wild  animal  of  a  dangerous  or  mis- 
chievous disposition  does  so  at  his  peril.  If  it  injures  another, 
he  is  liable. 

5.  One  who  keeps  domestic  animals  is  liable  if  they  escape  and 
trespass  upon  another's  land.  But  he  is  not  liable  for  injuries 
due  to  their  vicious  disposition  unless  he  knows  of  such  vicious 
propensity  in  the  particular  animal  doing  the  injury.  Wild  ani- 
mals and  vicious  domestic  animals,  known  to  be  such,  one  keeps 
at  his  peril. 

182.  Trademarks ;  good  will ;  names.  These  are  incorporeal 
property  rights  which  call  for  special  mention. 

1.  Trademarks.  A  trademark  is  a  name,  symbol,  or  other 
device  put  upon  goods  by  a  manufacturer  or  dealer  in  order  to 
distinguish  them  from  like  goods  of  other  persons.  It  is  a  kind 
of  commercial  seal  or  signature. 

If  the  name  or  device  is  invented  or  fanciful,  the  user  of  it 
gets  a  property  right  in  it.    But  if  it  is  a  word  of  common  use, 


§  ,82]  CLASSIFICATION  305 

he  cannot  get  an  exclusive  property  right  in  it,  although  he 
might  prevent  another  from  using  it  in  the  same  connection 
for  the  purpose  of  deceiving  the  public.  Words  which  merely 
describe  the  article,  however,  cannot  become  in  any  sense 
exclusive  trademarks ;  nor  can  geographical  names,  because 
others  in  the  same  place  have  an  equal  right  to  the  name  of 
the  place  of  manufacture. 

Exa?nples.  Excelsior  Stoves,  Hoosier  Drills,  Electro-Silicon  Powder,  Con- 
gress Water,  Champion  Flour,  303  Pens,  and  the  like  are  good  trademarks. 
Lackawanna  coal  is  not  as  against  another  miner  in  the  same  locality,  nor 
Worcestershire  sauce,  nor  Philadelphia  cement.  But  if  one  makes  tobacco 
at  Durham  and  calls  it  "  Durham  tobacco,"  he  may  prevent  another  person 
making  tobacco  elsewhere  from  using  the  same  name.  So  if  one  changes 
but  a  single  letter,  the  legend  may  be  deceptive  though  a  different  word 
is  used,  as  where  A  has  used  the  words  "  Royal  Pens"  and  B  puts  out  a 
product  called  "  Loyal  Pens." 

2.  Good  will.  The  good  will  of  a  business  is  the  good  opinion 
of  customers  concerning  the  business  and  the  probability  that 
they  will  continue  to  patronize  it.  It  is  a  valuable  asset  and 
may  be  sold  with  a  business.  Usually  its  sale  is  evidenced  by 
the  right  to  use  the  old  name,  perhaps  with  that  of  the  successor 
added.  The  seller,  if  he  has  included  good  will  in  the  sale  with 
the  right  to  use  his  name,  cannot  set  up  a  rival  business  under 
the  same  name.  If  there  is  no  sale  of  the  right  to  use  his 
name,  he  may  set  up  a  rival  business  under  the  name  but  can- 
not represent  himself  as  carrying  on  the  old  business  or  as  the 
successor  of  it. 

3.  Names.  A  man  may  choose  his  own  name,  although  he 
usually  bears  his  father's  surname  and  the  Christian  name  given 
him  at  his  birth.  In  order  to  avoid  the  loss  of  evidence  as  to 
identity,  statutes  provide  for  a  record  of  change  of  name  if  one 
chooses  to  avail  himself  of  it,  but  one  may  nevertheless  acquire 
a  new  name  by  usage.  The  law  disregards  all  middle  names  ; 
it  is  legally  sufficient  to  use  the  first  Christian  name  and  the 
surname.  So  the  word  "  junior  "  or  "  senior  "  is  merely  descrip- 
tive and  no  part  of  the  name.  A  man  cannot  prevent  another 
from  using  his  name  unless  the  other  uses  it  for  fraudulent 


306 


PERSONAL  PROPERTY  [Ch.  XV 


purposes.  And  one  may  even  be  enjoined  from  so  using  his 
own  name  in  trade  as  to  work  a  fraud,  as  where  after  A.  B.  has 
sold  a  certain  kind  of  gun  as  "  A.  B.'s  gun,"  another  person  of  the 
same  name  puts  a  gun  on  the  market  stamped  "A. B.'s  gun." 

183.  Estates  in  personal  property.  Personal  property,  like  real 
property,  may  be  owned  by  two  or  more  persons  as  joint  tenants, 
tenants  in  common,  partners,  tenants  by  the  entireties,  and  in 
community  (see  sec.  160). 

There  may  be  a  life  interest  or  estate  in  personal  property 
with  a  remainder  or  reversion  in  another.  If  the  property  is 
corporeal,  the  life  tenant  may  possess  and  use  it ;  but  if  it  is  in 
the  nature  of  money  or  security,  the  executor  usually  invests  it 
and  pays  the  income  to  the  tenant  for  life.  If  the  property  is 
such  as  is  consumed  in  the  use,  it  must  be  intended  that  the 
remainder-man  shall  have  only  what  may  be  left  at  the  life  ten- 
ant's death. 

There  may  also  be  a  trust  of  personal  property  (see  sec.  161). 

II.  Acquisition  and  Transfer 

184.  Acquisition  by  occupancy  and  by  finding  lost  property.   The 

title  to  personal  property  may  be  acquired  by  taking  possession 
of  what  no  one  owns  or  by  taking  possession  of  what  some 
one  has  lost  but  never  reclaims. 

i.  Occupancy.  Personal  property  may  be  acquired  by  occu- 
pancy, that  is,  by  taking  into  one's  possession  what  previously 
belonged  to  no  one  or  what  has  been  abandoned  by  a  previous 
owner.  The  taking  of  wild  animals,  the  taking  of  fish,  and  the 
taking  of  seaweed  on  one's  own  property  or  on  property  common 
to  all  are  examples  of  the  first  method.  Raising  a  sunken  vessel 
abandoned  by  the  owner  would  be  an  example  of  the  second. 

2.  Lost  property.  Lost  property  calls  for  special  considera- 
tion. The  general  rule  as  to  the  title  of  the  finder  is  that  if 
one  finds  and  appropriates  lost  property  he  has  a  title  good 
against  all  but  the  true  owner. 

The  law  distinguishes,  however,  between  lost  property  and 
mislaid  property.    If  one  finds  a  pocketbook  on  the  floor  of  a 


§  i85]  ACQUISITION  AND  TRANSFER  307 

store,  it  is  lost  property  and  belongs  to  the  finder  unless  the 
true  owner  reclaims  it.  But  if  he  finds  a  pocketbook  on  the 
counter  of  a  store,  it  is  mislaid  or  left  property  and  belongs  to 
the  owner  of  the  store  as  bailee  for  the  true  owner,  instead  of 
to  the  finder.  Should  the  true  owner  never  reclaim  it,  the 
storekeeper  retains  it. 

Treasure-trove  is  money,  coin,  or  bullion  hidden  or  concealed 
in  the  earth  or  other  secret  place.  In  England  it  belongs  to 
the  crown  if  no  true  owner  claims  it.  In  this  country  it  is  gen- 
erally treated  as  lost  property  and  belongs  to  the  finder  as 
against  the  owner  of  the  lands  where  discovered. 

Statutes  often  regulate  the  rights  of  finders  of  lost  property, 
and  generally  require  the  finder  to  advertise  the  property  found. 
In  case  the  true  owner  does  not  reclaim  it,  some  statutes  pro- 
vide that  the  property  or  its  proceeds  shall  in  whole  or  in  part 
go  to  some  public  fund.  The  rights  of  finders  of  estrays  (lost 
cattle)  are  particularly  governed  by  statute. 

If  the  finder  knows  who  the  owner  is,  or  if  the  property  dis- 
closes to  whom  it  belongs,  the  finder  is  guilty  of  larceny  in 
keeping  the  property  as  his  own.  But  in  order  that  this  rule 
shall  apply  the  finder  must  know  these  facts  at  the  time  of  the 
finding  and  then  form  the  felonious  intent. 

Examples :  1 .  X  bought  an  old  safe  and  delivered  it  to  A  to  repair. 
A  found  in  the  space  between  the  outer  wall  and  the  lining  a  sum  of  money. 
A  may  retain  the  money  as  against  X. 

2.  A  customer  in  a  shop  laid  his  pocketbook  on  a  table  and  went  away 
and  forgot  it.  Another  customer  found  it  there.  The  shopkeeper  is  entitled 
to  it  as  against  the  finder. 

3.  A  was  working  for  X  in  the  latter's  paper  mill,  and  in  picking  over 
rags  and  paper  found  a  number  of  bank  bills.  A  is  entitled  to  them  as 
against  X. 

4.  A  conductor  on  a  railway  train  finds  a  pocketbook  in  the  train.  It 
belongs  to  the  conductor  as  against  the  railway  company. 

5.  A  and  B,  while  working  for  X  in  removing  an  old  building,  discov- 
ered a  rusty  tin  can  containing  a  large  sum  of  money.  Who  hid  it  there  is 
unknown.    The  money  belongs  to  A  and  B  as  against  X. 

185.  Accession  and  confusion.  Title  by  accession  arises  from 
the  following:  circumstances  :  the  natural  increase  from  land 


308  PERSONAL  PROPERTY  [Ch.  XV 

and  animals ;  the  uniting  of  the  property  or  labor  of  one  with 
the  property  of  another;  the  confusion  of  the  goods  of  one 
with  the  goods  of  another. 

1.  Natural  increase.  It  is,  of  course,  too  plain  for  argument 
that  if  one  owns  land  he  owns  its  increase  whether  produced 
by  nature  or  by  industry.  So,  too,  if  one  owns  animals  he  owns 
their  young,  the  rule  being  that  the  offspring  go  with  the  clam 
or  mother. 

2.  Accession  of  chattels,  (a)  If  the  chattel  of  one  is  without 
his  consent  united  with  the  land  of  another  so  as  to  become  a 
fixture,  the  chattel  becomes  realty  and  belongs  to  the  owner 
of  the  land  ;  the  owner  of  the  chattel  has  only  an  action  for 
damages  for  conversion.  This  is  because  the  land  is  regarded 
as  the  principal  thing  and  the  chattel  as  an  accessory. 

(b)  A  similar  rule  applies  when  the  chattel  of  one  is  insepa- 
rably united  with  the  chattel  of  another:  the  whole  belongs 
to  the  owner  of  the  principal  chattel,  while  the  owner  of  the 
accessory  chattel  has  only  an  action  for  conversion.  Should 
the  chattels  be  of  approximately  similar  kind  and  value,  the 
owners  would  become  owners  in  common  of  the  new  product. 
A  thing  may  be  accessory,  however,  which  is  of  greater  value 
than  the  principal  chattel,  if  the  latter  gives  its  name  and 
character  to  the  whole,  as  where  materials  of  greater  value 
than  an  old  wagon  are  used  to  repair  and  renovate  it.  So,  too, 
things  of  inferior  value  may  by  their  owner  be  united  by  his 
labor  or  skill  with  things  of  greater  value  so  as  to  create  a 
practically  new  thing  which  will  belong  to  him,  as  where  with 
a  smaller  quantity  of  his  wool  united  with  a  greater  quantity 
of  another's  wool  he  weaves  cloth,  or  with  a  smaller  quantity 
of  his  material  united  with  a  larger  quantity  of  another's  he 
makes  a  ship,   or  furniture,   or  gold  or  silver  ornaments. 

(c)  -Jf  a  workman  makes  a  new  product  by  putting  labor 
upon  another's  chattel  so  that  there  is  a  complete  change  of 
identity,  the  product  belongs  to  the  workman.  If  there  is  not 
a  complete  change  of  identity,  the  chattel  will  belong  to  him  if 
the  labor  innocently  bestowed  is  the  principal  item  in  the  value 
of  the  new  product,  but  will  belong  to  the  owner  of  the  chattel 


§i86]  ACQUISITION  AND  TRANSFER  309 

if  the  latter  is  the  principal  item  in  the  value  of  the  new  prod- 
uct. This  last  rule  is  qualified  where  the  workman  knows  the 
material  is  not  his,  many  courts  holding  that  in  such  case  he 
must  lose  his  labor  although  it  may  be  more  valuable  than  the 
chattel. 

Examples  :  1.  B  uses  some  links  belonging  to  C  in  making  a  chain  most 
of  which  was  made  from  his  own  links.  The  chain  is  wholly  B's.  Had  the 
links  of  C  about  equaled  those  of  B  in  number,  the  two  would  have  been 
owners  in  common. 

2.  B  takes  $8  worth  of  canvas  belonging  to  him  and  $40  worth  belong- 
ing to  C,  adds  #10  worth  of  labor  and  makes  a  sail.    The  sail  belongs  to  C. 

3.  B  by  mistake  cuts  wood  on  C's  land.  The  wood  as  it  was  while 
growing  was  worth  about  #3  a  cord.  B's  labor  in  cutting  it  into  wood  is 
worth  about  $2  a  cord.    The  wood  belongs  to  C. 

4.  B  by  mistake  takes  C's  trees  worth  about  #25  and  makes  them  into 
hoops  worth  about  #700.  Thi  hoops  belong  to  B.  A  small  excess  of  value 
of  the  labor  would  not  be  enough  to  deprive  C  of  his  property,  but  if  the 
excess  is  great  the  labor  becomes  clearly  the  principal  thing  and  the  mate- 
rial the  accessory  thing. 

5.  As  above.  B  knows  the  trees  belong  to  C  and  puts  the  labor  upon 
them.  C  may  claim  the  hoops.  B  loses  his  labor  because  of  his  own  con- 
scious wrong  in  converting  C's  property. 

6.  In  Example  5  B  sells  the  hoops  to  X,  an  innocent  purchaser.  C  may 
reclaim  them.    Since  B  had  no  title  he  could  give  none. 

3.  Confusion  of  goods.  If  the  goods  of  one  are  so  confused 
with  the  like  goods  of  another  that  they  cannot  be  distinguished 
and  separated,  the  title  to  the  mass  will  depend  (a)  upon  the 
innocence  or  willfulness  of  the  owner  who  caused  the  confusion, 
and  (b)  if  willful,  upon  the  possibility  of  clearly  proving  how 
much  of  his  product  is  in  the  mixture,  (a)  If  the  confusion  is 
innocent,  each  will  be  entitled  to  his  aliquot  portion  of  the  mass 
as  that  may  be  reasonably  established.  The  same  rule  applies 
where  the  confusion  is  by  consent,  as  where  wheat  of  several 
owners  is  mingled  in  a  warehouse,  (b)  If  the  confusion  is  will- 
ful, the  one  causing  it  can  claim  his  share  only  if  he  can  clearly 
and  decisively  prove  how  much  of  each  was  mingled;  failing 
in  this  he  forfeits  the  whole  mass  to  the  innocent  party. 

186.  Transfer  by  gift.  A  gift  is  a  transfer  of  property  by 
the  owner  without  consideration.    A  gift  inter  vivos  is  a  gift 


3io 


PERSONAL  PROPERTY  [Ch.  XV 


to  take  effect  at  once  by  transfer  of  absolute  possession  to  the 
donee,  and  is  irrevocable.  A  gift  causa  mortis  is  a  gift  made 
by  one  in  peril  of  imminent  death  by  transfer  to  the  donee,  but 
upon  condition  that  if  the  donor  survives  the  peril  he  may 
revoke  the  gift  and  reclaim  the  property. 

In  a  gift  inter  vivos  delivery  is  the  essential  requisite,  coupled, 
of  course,  with  the  intent  to  transfer  as  a  gift.  An  intent  to 
give  is  not  enough.  A  promise  to  give  is  not  effective  because 
there  is  no  consideration  for  the  promise.  There  must  be  actual 
delivery  so  as  to  put  the  subject-matter  of  the  gift  out  of  the 
control  of  the  donor.  If  the  article  is  one  that  may  be  delivered 
by  manual  transfer,  that  form  should  be  followed.  But  if  it  is 
bulky,  or  in  the  hands  of  a  third  person,  a  symbolic  delivery  will 
do,  as  the  delivery  of  a  key  to  the  place  where  the  article  is 
kept,  or  the  transfer  of  a  warehouse  receipt ;  but  the  delivery 
of  the  donor's  own  check  (order)  on  a  bank  is  not  effective  as 
a  gift  unless  before  the  death  of  the  donor  the  donee  actually 
obtains  the  money.  If  the  donee  is  already  in  possession,  no 
new  delivery  is  necessary ;  it  is  enough  to  show  clearly  the 
words  of  the  gift.  So  a  deed  of  gift  duly  delivered  will  take  the 
place  of  the  delivery  of  the  subject-matter  itself.  If  one  wishes 
to  forgive  a  debt,  he  should  give  the  debtor  a  release  under  seal; 
but  a  receipt  in  full  duly  delivered  and  the  balancing  of  the 
account  on  the  books  of  the  donor  have  been  held  sufficient. 

In  a  gift  causa  mortis  delivery  is  also  necessary.  The  peculi- 
arity of  this  gift  is  that  it  must  be  made  in  contemplation  of 
imminent  death  (not  merely  of  human  mortality),  and  that  it  is 
to  become  absolute  only  in  case  the  donor  dies  of  the  illness 
or  peril  then  existing,  without  having  revoked  the  gift.  If  he 
recovers  or  escapes  the  peril,  he  may  reclaim  the  gift,  and  he 
may  before  his  death  revoke  it.  One  in  his  last  illness  may  make 
an  absolute  gift  inter  vivos  or  a  conditional  gift  causa  mortis, 
and  it  is  a  question  of  fact  whether  he  intended  to  make  the 
one  or  the  other.  A  gift  causa  mortis  bears  considerable  resem- 
blance to  a  legacy  in  a  will,  differing  mainly  in  this,  that  the 
article  is  delivered  to  the  donee  before  the  death  of  the  donor, 
and  no  writing  is  necessary. 


§i87]  ACQUISITION  AND  TRANSFER  311 

Examples :  1.  A  father  places  in  an  envelope  certain  articles  and  secu- 
rities, indorses  it,  "  The  inclosed  are  for  my  son  John,"  signs  his  name,  and 
puts  the  envelope  and  its  contents  into  his  safe,  where  they  are  found  after 
his  death.    This  is  not  a  valid  gift.    There  has  been  no  delivery. 

2.  A  father  gave  to  X  a  bag  of  coin,  saying  the  contents  were  for  his 
daughter.  This  was  a  valid  gift.  The  delivery  may  be  to  a  third  person  for 
the  donee. 

3.  A  father  loaned  his  son  a  horse  and  buggy.  After  the  son  had  pos- 
session the  father  said,  "  I  give  you  that  horse  and  buggy."  This  was  a 
valid  gift.    There  need  not  be  a  new  delivery  at  the  time  of  the  gift. 

4.  A  father  in  contemplation  of  immediate  death  gave  to  his  son  his  (the 
father's)  promissory  note  for  $1000,  and  to  his  daughter  his  (the  father's) 
check  on  a  bank  for  $1000.  The  first  gift  is  invalid  ;  it  is  a  mere  promise 
to  pay  or  to  give.  The  second  gift  is  valid  if  the  check  is  cashed  before  the 
father's  death,  but  the  death  of  the  father  revokes  the  authority  of  the  bank 
to  pay  it. 

5.  A  father  gives  and  delivers  to  his  son  the  promissory  note  of  X,  and 
to  his  daughter  the  check  of  Y.  These  are  valid  gifts.  If  the  instruments 
are  payable  to  the  father's  order,  he  should  indorse  them,  but  his  failure  to 
do  so  will  not,  it  seems,  render  the  gift  invalid,  although  the  courts  are  not 
entirely  in  harmony  upon  that  point. 

6.  A  donor  in  his  last  illness  told  the  nurse  that  his  pocketbook  was 
under  the  pillow,  and  that  she  was  to  take  it  and  give  it  to  his  son.  After 
his  death  the  nurse  took  it  and  gave  it  to  the  son.  This  was  not  a  valid  gift, 
because  there  was  no  delivery  in  the  lifetime  of  the  donor. 

7.  The  donor  has  money  deposited  in  a  savings  bank.  He  delivers  the 
savings-bank  book  to  the  donee  as  a  gift.  Most  courts  hold  this  sufficient 
to  constitute  a  valid  gift.  It  would  not  be  sufficient  in  the  case  of  an  ordi- 
nary deposit  in  a  bank  of  deposit ;  in  such  case  there  must  be  a  due  and 
formal  assignment  of  the  claim  against  the  bank. 

8.  If  B  with  the  intent  to  make  a  gift  to  C  deposits  money  in  a  savings 
bank  in  the  name  of  C,  and  takes  the  savings-bank  book  in  C*s  name,  there 
is  a  valid  gift.  But  intent  must  be  established  ;  it  may  be  that  the  deposit 
was  made  in  this  way  because  B  had  already  deposited  in  his  own  name  all 
that  the  rules  of  the  bank  permitted.  The  delivery  of  the  book  to  C  would 
be  quite  decisive  of  intent,  but  this  is  not  essential  if  intent  otherwise 
appears,  as  from   a  declaration  that  he  has  made  the  gift. 

9.  One  may  make  a  gift  in  the  form  of  a  trust  either  (a)  by  declaring 
that  he  holds  a  sum  of  money  in  trust  for  C  or  (b)  by  transferring  the  sum 
to  T  to  hold  in  trust  for  C.  In  the  first  case  there  is  an  "equitable  gift" 
without  any  delivery  and  by  a  mere  declaration. 

187.  Other  modes  of  transfer.  Other  modes  of  transfer  are  by 
sale,  will,  distribution  when  the  owner  dies  intestate,  seizure  and 


312  PERSONAL  PROPERTY  [Ch.  XV] 

sale  for  debt,  mortgage,  and  at  common  law  by  marriage.  Only 
a  word  need  be  added  as  to  these. 

A  chattel  mortgage  is  the  transfer  of  the  title  to  personal 
property  as  security  for  a  debt,  upon  condition  that  if  the  debt 
is  duly  paid  the  mortgage  and  transfer  shall  be  null  and  void. 
It  is  generally  provided  that  in  order  to  be  valid  against  subse- 
quent purchasers  or  mortgagees  in  good  faith  the  chattel  mort- 
gage must  be  duly  recorded,  and  some  states  require  it  to  be 
renewed  annually  in  order  to  remain  valid.  Unless  otherwise 
stipulated  the  mortgagee  is  entitled  to  possession,  but  it  is  usual 
to  leave  the  mortgagor  in  possession  until  default  or  until  the 
mortgagee  feels  insecure.  When  possession  is  taken  after 
default  the  mortgagee  becomes  the  owner  of  the  goods  at  law, 
but  equity  gives  the  mortgagor  a  right  to  redeem  them.  To  cut 
off  this  right  the  mortgagee  forecloses  it  by  a  sale  of  the  goods 
either  under  a  judicial  proceeding  or,  if  the  mortgage  gives  him 
a  power  of  sale,  without  such  proceeding.  Most  states  have 
statutes  regulating  foreclosures. 

At  common  law  a  husband  was  entitled  to  all  the  personal 
property  owned  by  the  wife  at  the  time  of  the  marriage.  Most 
states  have  changed  this  rule  by  providing  that  a  married  woman 
shall  continue  to  own  and  control  all  her  property  the  same  as 
an  unmarried  woman. 


REVIEW  QUESTIONS 

Section  180.  Of  what  does  personal  property  consist  ?  What  are  choses 
in  action?  When  does  personal  property  become  realty?  When  does  real 
property  become  personalty  ?    What  property  attached  to  land  is  personalty  ? 

181.  What  right  has  a  landholder  in  wild  animals  on  his  land  ?  What 
sort  of  property  has  one  in  a  captured  animal?  How  is  it  lost?  If  one 
kills  a  wild  animal  whose  is  it?  For  what  damage  done  by  his  domestic 
animals  is  one  liable?  by  wild  animals  kept  in  captivity? 

182.  What  is  a  trademark?  When  is  it  property?  If  not  property,  has 
any  one  a  right  to  use  it?  What  is  good  will?  What  property  has  one  in 
his  name?    What  is  the  name  recognized  by  the  law  as  sufficient? 


REVIEW  QUESTIONS  313 

183.  What  estates  in  personal  property? 

184.  What  is  title  by  occupancy?  Who  owns  lost  and  found  property? 
What  is  mislaid  property?  What  is  treasure-trove?  Who  owns  it?  When 
is  a  finder  of  lost  property  guilty  of  larceny? 

185.  What  is  title  by  accession?  If  the  chattels  of  different  owners  are 
annexed,  who  owns  the  article  so  made?  If  one  puts  labor  on  another's 
chattel  and  increases  its  value,  who  owns  it?  Distinguish  and  illustrate.  If 
one  innocently  mixes  his  goods  with  others',  who  owns  the  mass?  If  one 
willfully  mixes  them,  who  owns  the  mass? 

186.  What  is  a  gift  inter vivos  ?  What  is  a  gift  causa  mortis?  Explain 
the  essentials  of  each.  How  can  one  make  a  gift  of  a  debt  to  his  debtor?  Is 
a  gift  revocable?  Can  one  make  a  gift  of  his  own  promissory  note  or  check, 
and  why?  When  is  a  gift  of  a  savings-bank  deposit  good?  Can  one  make 
a  gift  inter  vivos  without  delivery? 

187.  What  other  modes  of  transfer  of  personalty?  What  is  a  chattel 
mortgage?  Why  should  it  be  recorded?  Who  is  entitled  to  possession  of 
the  mortgaged  chattels?  After  default  where  is  the  title?  What  is  the 
equity  of  redemption  and  how  is  it  disposed  of?  What  effect  has  marriage 
on  the  title  to  personalty? 


GLOSSARY 


[Terms  fully  defined  in  the  text  are  not  included  in  this  Glossary.     For  such  terms  the 
Index  should  be  consulted.] 


Abstract  of  title.  An  outline  history  of 
the  title  to  land,  consisting  of  a  synop- 
sis or  summary  of  all  conveyances, 
mortgages,  liens,  and  charges  affect- 
ing the  parcel  of  land  in  question. 

Acceptance,  (a)  The  assent  of  the  of- 
feree to  the  proposal  of  the  offeror, 
thus  concluding  a  contract ;  (6)  the 
act  by  which  the  drawee  of  a  bill  of 
exchange  assents  to  the  request  of 
the  drawer  to  pay  it  and  makes  him- 
self liable  to  pay  it. 

Acceptor.  The  person  who  accepts  a 
bill  of  exchange. 

Acceptor  supra  protest.  The  person 
who,  after  it  is  protested,  accepts  a 
bill  of  exchange  for  the  honor  of  the 
drawer  or  an  indorser. 

Accession,  (ti)  That  which  is  united  to, 
or  produced  by,  property;  (b)  the  right 
to  all  that  one's  property  produces  or 
that  is  united  to  one's  property. 

Accommodation  paper.  A  bill  or  note 
to  which  the  accommodating  party 
puts  his  name  as  indorser,  maker,  or 
drawer  without  consideration,  in  order 
to  lend  his  credit  to  another. 

Acknowledgment.  (</)  In  conveyancing, 
the  act  by  which  one  who  has  exe- 
cuted a  deed  or  other  instrument 
goes  before  a  notary  public,  or  other 
authorized  officer,  and  declares  or 
acknowledges  that  he  did  execute  the 
same  ;  (/')  the  certificate  of  the  officer 
to  that  effect. 


Act  of  God.  Inevitable  accident  beyond 
human  foresight  or  control.  See  Vis 
major. 

Act  of  honor.  The  instrument  drawn 
up  by  a  notary  certifying  that  a  bill 
has  been  protested  and  that  a  person 
named  has  accepted  or  paid  it  for  the 
honor  of  the  drawer  or  an  indorser. 

Action.  The  proceeding  in  a  court  for 
the  enforcement  of  a  right ;  also  called 
a  suit. 

Administrator.  A  person  appointed  by 
the  court  to  administer  the  estate  of 
a  deceased  person  who  has  not  by 
will  named  an  executor.  The  femi- 
nine is  administratrix. 

Admiralty.  (a)  The  system  of  law  gov- 
erning maritime  causes ;  (i>)  the  court 
administering  this  law. 

Adult.  One  of  the  full  legal  age,  usu- 
ally twenty-one  years. 

Adverse  possession.  A  possession  of 
real  property  adverse  to  the  right  or 
title  of  another.  If  continued  for  a 
specified  period,  usually  twenty  years, 
it  cuts  off  the  right  of  the  other  to 
reclaim  the  property. 

Affidavit.  A  written  declaration  under 
oath. 

Agistor.  One  who  pastures  cattle  for 
another. 

Aleatory  (Latin  alea,  a  die,  or  chance). 
Depending  upon  an  uncertain  event. 

Alienate.  To  convey ;  to  transfer  the 
title  to  property. 


315 


316 


GLOSSARY 


Allonge.  The  strip  of  paper  attached 
to  a  bill  or  note  to  receive  further 
indorsements  after  the  back  of  the 
instrument  is  filled. 

Alteration.  Changing  the  terms  of  a 
written  instrument. 

Ambiguity.  Doubtfulness  or  double- 
ness  of  meaning. 

Ancestor.  One  from  whom  a  person 
has  descended  in  a  direct  line.  Some- 
times used  in  the  broader  sense  of  one 
from  whom  a  person  has  inherited 
lands. 

Annuity.  A  yearly  sum  stipulated  to 
be  paid  to  a  person. 

Answer,  (a)  In  pleading,  the  matter  set 
up  by  way  of  defense  to  an  action ; 
(6)  a  formal  written  statement  con- 
taining the  defense  to  an  action. 

Ante  (Latin,  before).  Refers  to  a  pre- 
ceding part  of  a  book. 

Appeal.  The  removal  of  a  cause  from 
an  inferior  to  a  superior  court  in 
order  to  have  the  action  of  the  lower 
court  reviewed. 

Articles.  A  contractual  document  con- 
taining the  terms  of  an  agreement. 

Assets,  (a)  Property  of  a  deceased 
person  or  a  bankrupt  available  for 
payment  of  debts  ;  (6)  the  aggregate 
available  property  of  a  merchant. 

Assignment.  The  transfer  of  rights  or 
interests. 

Attachment.  A  process  by  which  prop- 
erty is  seized  pending  a  suit. 

Bankrupt.  A  person  who  under  the 
bankruptcy  laws  is  liable  to  have  his 
property  seized  and  distributed  among 
his  creditors. 

Beneficiary,  (a)  A  person  entitled  to 
the  income  or  enjoyment  of  property 
the  title  to  which  is  held  by  another 
as  trustee ;  (l>)  the  person  to  whom 
a  life  insurance  policy  is  payable. 


Bequeath.  To  give  personal  property 
by  will  to  another. 

Bequest.  A  legacy  or  gift  of  personal 
property  by  will. 

Bilateral.  In  contract,  signifying  an 
agreement  executory  on  both  sides. 

Bona  fides  (Latin,  good  faith).  Bona 
fide,  in  good  faith. 

Bond.  A  sealed  obligation  to  pay 
money.  A  bond  and  mortgage  con- 
sists of  a  bond  with  a  mortgage  to 
secure  its  payment. 

Bought  and  sold  note.  A  bought  note 
is  given  to  the  seller  and  a  sold  note 
is  given  to  the  buyer  by  a  broker 
who  acts  as  agent  between  the  par- 
ties. These  are  memoranda  of  the 
contract. 

Boycott  (from  the  name  of  one  Boy- 
cott, who  was  agent  for  an  estate  in 
Ireland),  (a)  A  combination  to  cease 
dealing  with  a  person  ;  (6)  a  conspir- 
acy to  induce  others  to  cease  dealing 
with  a  person. 

Breach.  The  violation  or  nonfulfill- 
ment of  an  obligation. 

By-laws.  Regulations  or  rules  adopted 
by  a  corporation  for  its  own  govern- 
ment. 

Cargo.  Goods  and  merchandise  put  on 
board  a  ship  to  be  carried  from  one 
port  to  another. 

Case.  A  statement  of  facts  upon  which 
an  action  in  a  court  is  based. 

Caveat  emptor  (Latin).  Let  the  buyer 
beware. 

Caveat  venditor  (Latin).  Let  the  seller 
beware. 

Champerty.  A  bargain  by  which  an 
attorney  agrees  to  carry  on  a  suit  at 
his  own  risk  and  cost  in  considera- 
tion that  he  shall  receive  in  case  of 
success  a  part  of  the  proceeds  of  the 
suit. 


GLOSSARY 


317 


Chancery,  (a)  A  court  of  equity ;  (6)  the 
system  of  jurisprudence  administered 
in  a  court  of  equity. 

Charter.  (</)  A  legislative  act  together 
with  proceedings  taken  thereunder 
by  which  a  corporation  is  created; 
(6)  to  hire  or  lease  a  vessel. 

Charter  party.  The  contract  by  which 
a  vessel  or  some  principal  part  there- 
of is  let  for  a  voyage. 

Chattel.  An  article  of  personal  prop- 
erty. A  more  comprehensive  phrase 
than  goods,  since  it  includes  chattels 
real. 

Chattel  real.  A  chattel  interest  in 
land,  as  a  leasehold. 

Chose.  A  thing ;  any  article  of  prop- 
erty. A  chose  in  action  is  a  right  of 
action  to  recover  a  debt,  demand,  or 
thing. 

Civil  action.  An  action  to  establish  a 
private  right,  as  distinguished  from  a 
criminal  action. 

Civil  law.  The  Roman  law  as  distin- 
guished from  the  English  law. 

Code.  A  legislative  enactment  intended 
to  embody  the  law  on  a  particular 
topic  or,  as  in  some  states,  on  all 
topics. 

Collateral.  (</)  In  the  law  of  descent,  in 
a  side  line,  not  direct  or  lineal ;  (/')  in 
commercial  law,  a  security  additional 
to  the  personal  obligation. 

Commercial  paper.  Bills,  notes,  and 
checks  given  in  the  course  of  com- 
mercial transactions.  It  does  not  in- 
clude accommodation  paper. 

Common  law.  (a)  The  law  of  Eng- 
land, as  distinguished  from  the  civil 
law ;  (/')  that  part  of  the  law  of 
England  developed  by  the  common 
law  courts. 

Complaint.  The  name  of  the  pleading 
by  the  plaintiff  in  an  action  at  law. 
Sometimes  called  a  declaration. 


Composition.  An  agreement  between 
an  insolvent  debtor  and  his  creditors 
whereby  the  latter  agree  to  take  less 
than  the  whole  of  their  claims. 

Compromise.  An  agreement  to  settle 
a  dispute  made  in  view  of  the  un- 
certainty of  legal  rights. 

Conversion.  An  unauthorized  assump- 
tion and  exercise  of  ownership  over 
goods  belonging  to  another.  It  is  a 
tort. 

Conveyance.  An  instrument  in  writing 
under  seal  by  wThieh  any  estate  in  real 
property  is  created,  aliened,  mort- 
gaged, or  incumbered. 

Copyright.  An  exclusive  right  granted 
by  the  government  to  multiply  and 
sell  a  literary  or  artistic  production. 

Corporeal.  Having  an  objective,  mate- 
rial existence. 

Costs.  An  allowance  made  to  a  success- 
ful party  to  a  suit,  to  compensate 
for  his  expenses  in  conducting  it. 

Covenant.  A  promise  contained  in  a 
sealed  instrument. 

Custom.  In  law,  a  usage  so  well  estab- 
lished as  to  be  regarded  as  having 
the  force  of  law. 

Damages.  A  pecuniary  compensation 
recovered  in  a  court  for  some  injury 
or  loss  sustained  through  the  wrong- 
ful act  or  omission  of  another. 

Deceit.  A  fraudulent  representation  or 
device  by  which  a  person  is  misled 
to  his  damage. 

Declaration.  The  pleading  in  which 
a  plaintiff  states  his  cause  of  action. 

'   See  Complaint. 

Decree.  The  name  given  to  the  judg- 
ment of  a  court  of  equity. 

Deed.  A  sealed  instrument  containing 
a  contract  or  conveyance. 

Defendant.  The  person  against  whom 
an  action  is  begun. 


3i8 


GLOSSARY 


Del  credere  (Italian,  of  trust  or  credit). 
Applied  to  an  agent  who  guaranties 
that  purchasers  will  pay  for  goods  of 
the  principal  sold  to  them. 

Descent.  In  real  property,  the  title 
given  by  force  of  law  upon  the  death 
of  an  owner. 

Devise.  A  gift  of  real  property  con- 
tained in  a  will.  "The  devisee  is  the 
one  to  whom -it  is  given  ;  the  devisor 
the  one  who  gives  it. 

Earnest.    A  sum  paid  to  bind  a  bargain. 

Easement.  A  right  in  the  owner  of  one 
parcel  of  land,  as  owner,  to  a  use  in 
the  land  of  another. 

Emblements.  Annual  products  of  the 
soil  raised  by  labor  and  industry. 

Equity.  The  system  of  jurisprudence 
administered  in  the  equity  courts. 
See  Chancery. 

Equity  of  redemption.  The  period 
allowed  by  equity  for  a  mortgagor, 
pledgor,  etc.,  to  reclaim  his  property 
by  paying  the  debt  secured  by  it. 

Escrow.  A  deed  delivered  to  a  third 
person  to  be  held  until  the  happen- 
ing of  some  contingency,  and  then 
delivered  to  the  grantee. 

Estate.  The  interest  one  has  in  prop- 
erty. Sometimes  used  broadly  to 
include  all  of  one's  possessions. 

Estoppel.  A  bar  raised  by  the  law  to 
preclude  a  man  from  setting  up  cer- 
tain facts  because  of  some  prior  ad- 
mission or  conduct.  The  verb  is  "  to 
estop." 

Estovers.  The  right  of  a  tenant  to 
take  wood  necessary  for  fuel,  fences, 
and  repairs  is  called  a  right  to  es- 
tovers. 

Executor.  A  person  appointed  by  the 
maker  of  a  will  (the  testator)  to  carry 
out  its  provisions.  The  feminine  is 
executrix. 


Fee  (same  as  feud  or  fief).  Originally 
land  held  of  a  superior  lord  in 
consideration  of  military  service. 
Now  an  estate  of  inheritance  in 
lands. 

Fee-simple.  An  absolute,  unqualified 
fee ;  the  largest  estate  one  can  have 
in  lands. 

Fee-tail  (from  French  taille,  a  cutting). 
A  fee  from  which  the  general  heirs 
are  cut  off  and  only  particular  heirs 
are  designated. 

Fiduciary,  (a)  As  a  noun,  a  person  in 
a  relation  of  trust  or  confidence ; 
(/')  as  an  adjective,  signifying  a  rela- 
tion of  trust  or  confidence. 

Forcible  detainer.  Keeping  possession 
of  lands  by  force. 

Forcible  entry.  Taking  possession  of 
lands  by  force. 

Foreclosure.  A  proceeding  for  extin- 
guishing the  right  of  a  mortgagor  or 
pledgor  to  redeem  the  property  given 
as  security  for  a  debt. 

Forgery.  Fraudulently  making  or  alter- 
ing a  writing  which  purports  to  create 
or  modify  a  legal  right  against  an- 
other. 

Franchise.  A  special  privilege  con- 
ferred by  law  upon  an  individual  or  a 
corporation,  which  does  not  belong  to 
persons  of  common  right. 

Fraud.  Some  willful  act  or  device  cal- 
culated to  influence  or  mislead  a  per- 
son to  his  prejudice. 

Fructus  industrials  (Latin).  Fruits  of 
industry ;  products  of  land  raised  by 
labor. 

Fructus  naturales  (Latin).  Fruits  of 
nature  ;  natural  products  of  land. 

Fungible.  Capable  of  being  estimated 
or  replaced  by  weight,  measure, 
or  number  without  reference  to 
the  particular  characteristics  of  each 
unit. 


GLOSSARY 


319 


Good  consideration.  A  consideration 
based  on  family  relationship  or  love 
and  affection.  A  valuable  considera- 
tion is  one  based  on  the  surrender  of 
something  having  a  legal  value. 

Goods.  Articles  of  personal  property. 
Usually  applied  to  inanimate  mov- 
ables.   Chattel  is  a  broader  term. 

Grant.  A  term  signifying  a  transfer  by 
deed  of  an  interest  in  real  property. 

Heir.  The  person  to  whom  by  law  the 
title  to  real  estate  descends  upon  the 
death  of  his  ancestor. 

In  statu  quo.  In  the  condition  in 
which  (one  was  before). 

In  transitu.    In  transit. 

Incorporeal.  Without  body  or  material 
substance. 

Incumbrance.  A  claim,  lien,  or  liability 
attached  to  property,  as  a  mortgage, 
judgment,  etc. 

Indemnify.  To  save  harmless ;  to 
secure  against  loss  or  damage. 

Indenture.  Formerly  a  deed  in  two 
copies  with  cut  or  serrated  edges  so 
that  one  would  fit  into  the  other. 
Now  any  deed  by  which  two  or  more 
parties  enter  into  reciprocal  obliga- 
tions. 

Indorse.    Literally,  to  write  on  the  back. 

Injunction.  A  writ  issued  by  a  court 
of  equity  forbidding  or  commanding 
something. 

Insolvency.  Inability  to  pay  debts  in 
due  course. 

Inter  vivos.    Between  the  living. 

Intestate.  Without  a  will  or  testa- 
ment. 

Joint  and  several.  An  obligation  by 
two  or  more  which  may  be  enforced 
against  all  jointly  or  each  individu- 
ally. 


Judgment.  The  decision  of  a  common 
law  court  in  an  action  before  it;  the 
final  determination  of  the  rights  of 
the  parties. 

L.S.     Abbreviation    for    locus    sigilli, 

place  of  the  seal. 
Law.    The  rules  by  which  courts  are 

controlled    in   the  administration   of 

justice. 
Legacy.    A  gift  of  personal  property  by 

will  and  testament. 
Levy.    A  seizure  of  property  to  satisfy 

a  judgment. 
License.    A  permit  to  do  an  act  which 

would  otherwise  be  illegal,  as  to  enter 

another's  lands,  but  not  creating  an 

easement. 
Lien.    A  charge  imposed  upon  property 

by  which  it  is  made  security  for  a 

debt  or  other  obligation. 
Liquidated  damages.   Agreed  or  ascer- 
tained damages ;  not  uncertain. 

Majority.  Full  legal  age ;  usually 
twenty-one  years. 

Minority.    Under  legal  age ;  infancy. 

Municipal  law.  The  law  of  a  partic- 
ular country  as  distinguished  from 
international  law. 

Negligence.  A  failure  to  use  the  care 
that  a  reasonably  prudent  man  would 
use  under  like  circumstances. 

Next  of  kin.  Those  relatives  who 
share  by  law  in  the  personal  prop- 
erty of  a  deceased  person. 

Nominal  damages.  A  trifling  sum 
awarded  to  vindicate  a  legal  right 
where  no  substantial  damages  have 
been  suffered. 

Notary  public.  A  public  officer 
authorized  to  certify  or  attest  doc- 
uments, take  acknowledgments  of 
deeds,  etc. 


320 


GLOSSARY 


Nuisance.  A  wrongful  act  which  dis- 
turbs another  in  the  enjoyment  of 
real  property  or  of  a  public  high- 
way. 

Obligation.  A  legal  duty  to  do  or  not 
to  do  a  certain  thing.  An  obligor  is 
one  who  has  undertaken  an  obliga- 
tion. An  obligee  is  one  entitled 
to  the  performance  of  an  obliga- 
tion. 

Orphans'  court.  The  name  given  to 
the  probate  court  in  a  few  states. 

Ownership.  The  right  to  possess  and 
use  property  to  the  exclusion  of 
others. 

Parol.  A  word  or  speech  ;  that  which 
is  expressed  orally ;  not  in  writing. 

Patent.  An  exclusive  right  granted 
by  the  government  to  make,  use,  and 
vend  an  article. 

Per  procuration,  (abbreviated  Per  pro.).  ■ 
By     proxy.      Used    in    England    to 
indicate    an    agent     that    is    acting 
under  a  special   or  limited    author- 
ity. 

Personal  representative.  An  execu- 
tor or  administrator  of  a  deceased 
person.  The  "  real  representative  " 
is  the  heir  of  the  deceased  person. 

Plaintiff.  The  person  who  brings  an 
action  in  a  court. 

Pleadings.  The  written  allegations 
as  to  claims  and  defenses  in  an 
action  in  a  court. 

Post  (Latin,  after).  Referring  to  a 
subsequent  portion  of  a  book. 

Prescription.  Title  by  adverse  posses- 
sion. The  law  indulges  the  fiction 
that  there  was  a  prior  writing  which 
is  now  lost. 

Probate.  To  prove,  as  to  probate  or 
prove  a  will.  A  probate  court  is 
one  in  which  wills  are  proved. 


Proof.    The  establishment  of  a  fact  by 

evidence. 
Pur    autre    vie    (or    per    autre    vie) 

(French).    For  another's  life. 

Quantum  meruit  (Latin).  As  much  as 
he  deserved.  Refers  to  an  action  for 
the  reasonable  value  of  services. 

Quantum  valebant  (Latin).  As  much 
as  they  were  worth.  Refers  to  an 
action  for  the  reasonable  value  of 
goods  sold  and  delivered. 

Quasi  (Latin).    Like;  corresponding  to. 

Ratification.  The  confirmation  of  a 
previous  contract  or  act  which  is  not 
binding. 

Receiver.  A  person  appointed  by  a 
court  to  take  possession  and  control 
of  property  pending  litigation  and 
some  final  decree  of  the  court. 

Recording  acts.  Statutes  providing  for 
the  recording  of  deeds,  mortgages, 
etc.,  in  some  public  office,  and  pro- 
viding that  the  record  shall  be  con- 
structive notice  to  all  subsequent 
purchasers  or  incumbrancers. 

Redemption.  The  act  by  which  a  mort- 
gagor, pledgor,  etc.,  reclaims  the  title 
and  possession  of  the  property  by 
paying  the  debt  so  secured. 

Release.  The  giving  up  of  a  claim  by 
the  person  entitled,  to  the  person 
against  whom  it  exists. 

Replevin.  An  action  to  recover  posses- 
sion of  goods. 

Rescission.  The  canceling  or  annul- 
ling of  a  contract  or  deed. 

Residuary  devisee.  The  person  who 
under  a  will  takes  all  the  lands  of  the 
testator  not  specifically  devised. 

Residuary  legatee.  The  person  who 
under  a  will  takes  all  the  personal 
property  of  the  testator  not  specific- 
ally bequeathed. 


GLOSSARY 


321 


SS.  An  abbreviation  used  after  the 
statement  of  the  venue  (state  and 
county)  and  supposed  to  be  a  con- 
traction of  scilicet  {scire  licet),  mean- 
ing "as  one  may  learn,"  or  "  to  wit," 
or  "  namely." 

Seised.  The  technical  term  describing 
the  possession  of  a  fee  in  lands.  This 
is  the  verb.    The  noun  is  "seisin." 

Seisin.  Under  the  feudal  system,  the 
completion  of  the  formalities  by 
which  one  was  given  possession  of 
a  fee  in  lands.  Now  the  possession 
of  a  fee. 

Set-off.  A  counter  claim  or  cross  de- 
mand which  a  defendant  sets  up 
against  the  claim  of  the  plaintiff. 

Simple,  (a)  In  real-property  law,  ab- 
solute, unconditional,  as  fee-simple ; 
(6)  in  contract  law,  unsealed. 

Specialty.    A  contract  under  seal. 

Specific  performance.  A  decree  by  an 
equity  court  that  a  party  shall  actu- 
ally perform  his  contract  promise 
instead  of  paying  damages  for  the 
breach. 

Status.    Legal  position  or  condition. 

Statute.    An  act  of  the  legislature. 

Statute  of  Limitations.  A  statute  fix- 
ing a  time  within  which  actions  must 
be  brought. 

Stock.  (<?)  The  total  capital  put  into  a 
corporate  enterprise  ;  (l>)  the  interest 
of  each  stockholder  in  the  corpora- 
tion. 

Subrogation.  The  substitution  of  one 
person  in  the  place  of  another  with 
respect  to  rights,  claims,  or  securities. 
The  verb  is  "  to  subrogate." 

Subscribe.  To  write  under;  to  write 
the  name  under  the  contract.  To 
sign  is  to  write  the  name  at  any  place, 
not  necessarily  underneath. 

Successor.  One  who  succeeds  another. 
Used  to  describe  those  who  constitute 


a  corporation  after  the  retirement  of 
preceding  corporators. 

Suit.  A  proceeding  in  a  court.  It  is 
not  uncommon  to  call  a  proceeding 
in  a  law  court  an  action,  and  one  in 
an  equity  court  a  suit ;  but  this  is  not 
a  necessary  distinction. 

Supra  protest.  Over  protest.  Used  in 
the  sense  of  "  after  protest." 

Surrogate.  Literally,  one  who  is  sub- 
stituted for  another.  By  present 
usage,  the  judicial ofticerwho presides 
over  a  probate  court  for  the  admin- 
istration of  the  estates  of  deceased 
persons. 

Tenant.  Broadly,  one  who  holds  land  ; 
specifically,  one  who  holds  land  for 
life  or  for  years  ;  popularly,  one  who 
holds  land  for  years  of  a  landlord  or 
lessor. 

Testament.  That  which  is  witnessed. 
Employed  as  a  synonym  for  will. 
Formerly  it  meant  a  will  of  person- 
alty but  is  now  used  interchangeably 
with  the  term  "will." 

Testator.  One  who  makes  a  will.  The 
feminine  is  testatrix. 

Title,  (a)  The  right  to  property;  (/>)  the 
evidence  of  the  right  to  property. 

Tort.  A  wrongful  act,  other  than  a 
mere  breach  of  contract,  for  which  a 
common  law  court  will  give  damages. 

Transcript.  An  official  copy  of  a  court 
record,  as  a  transcript  or  certified 
copy  of  a  judgment. 

Treasure-trove.  Treasure  found.  Trove 
is  French  for  "  found."  Technically, 
gold  or  silver  or  money  found  hidden 
in  a  secret  place. 

Trespass  (French  trespasser,  to  pass 
over  or  beyond).  To  invade  another's 
right  of  security  of  person  or  of  prop- 
erty. Commonly,  to  enter  another's 
lands  wrongfully. 


322 


GLOSSARY 


Trover  (French  trover,  to  find).  An 
action  for  the  recovery  of  damages 
for  the  conversion  of  goods,  based 
originally  on  a  fiction  that  the  de- 
fendant had  found  the  goods  and 
refused  to  return  them  to  the  right- 
ful owner. 

Trustee.  A  person  appointed  to  exe- 
cute a  trust. 


Vis  major  (Latin).  Superior  force.  In- 
cludes more  than  act  of  God,  as  the 
act  of  a  public  enemy. 

Void.  Null ;  of  no  effect.  This  is  the 
correct  meaning,  but  the  term  is  some- 
times used  in  the  sense  of  voidable. 

Voidable.  Capable  of  being  rendered 
void,  usually  at  the  election  of  one 
party  to  a  contract. 


Ultra  vires  (Latin).  Beyond  the  power. 
Applied  to  acts  of  corporations  be- 
yond the  charter  powers. 

Unilateral.  One-sided.  Applied  to  con- 
tracts where  only  one  promise  is  still 
unperformed. 

Vendor.    The  seller.    Usually   applied 

to  the  seller  of  real  property. 
Venue.     (<?)   Locality ;  place,     {i)  The 

heading  of  legal  documents  showing 

the  state  and  county. 
Verdict.    The  decision  of  a  jury  upon 

matters  submitted  to  it. 


Waiver.  The  surrender  of  some  right 
or  privilege  which  the  law  gives. 

Waste.  The  name  given  to  any  act  of 
a  tenant  whereby  the  value  of  the 
reversion  is  diminished,  as  the  cut- 
ting of  trees. 

Will.  A  written  instrument  executed 
as  the  statute  directs,  by  which  a 
person  makes  a  disposition  of  his 
property  to  take  effect  after  his  death. 

Witness,  (a)  One  who  gives  evidence 
in  a  court ;  (o)  one  who  sees  a  docu- 
ment executed  and  signs  his  name  to 
it  as  evidence  thereof. 


INDEX 


Abstract  of  title,  296 
Acceptance  and  receipt,  72 
Acceptance  for  honor,  194 

of  bill,  172,  191-195 

of  offer,  16-19 
Accession,  307-309 
Accident  insurance,  130 
Accommodation  indorser,  197 
Accounting  by  agent,  226 

by  partner,  247 
Act  of  God,  112,  115 
Action,  see  Remedies 
Administrative  law,  3,  51 
Admiralty  court,  8 
Adverse  possession,  291 
Agency,  215-237 

by  necessity,  222 
Agent,  41,  73,  138 

appointment  of,  217-224 

authority  of,  228-231 

liability  to  third  parties,  233 

obligations  to  principal,  225 

of  a  corporation,  261 
Agreement  in  contract,  14-16 
Air,  282 

Alteration  of  contract,  161,  190 
Animals,  304 
Answer,  9 

Antecedent  debt  as  value,  68 
Appointment  of  agents,  217-224 
Assault  and  battery,  5,  33 
Assignment  of  contract,  49-52 

of  lease,  300 

of  mortgage,  291,  294 
Attorney  at  law,  230 
Auctioneers,  230 
Authority  of  agent,  227-233 

of  corporate  officers,  261 

of  partner,  247-249 


Baggage,  123 

Bailee's  duties,  ior,  102,  104,  106,  109, 

"3 
Bailment,  96-127 

carriers  of  passengers,  122,  123 

common  carriers,  113-122 

gratuitous,  100-103 

innkeepers,  m-113 

mutual  benefit,  104-111 

telegraph  companies,  124 
Bailor's  duties,  101,  102,  104,  106,  108 
Bank  deposits,  151,  152 
Bankruptcy,  52,  59-61,  251 
Banks,  in,  150,  151 
Barter,  70,  97 
Bilateral  contract,  16 
Bill  of  exchange,  172 

of  lading,  1 19 

of  sale,  69 
Bills  in  a  set,  173 
Blanks  in  bill  or  note,  183 
Bona  fide  holder  for  value,  67,  187 
Bond,  22,  29,  30,  177,  264 
Boycott,  48 
Breach  of  contract,  56-59,  90,  91 

of  warranty,  86 
Brokers,  230 
Business,  1 
Business  law,  3 
Buyer's  duties,  81 

Call,  32 
Capital,  143 

Carriers  of  goods,  1 13-122 
of  passengers,  122,  239 
Cashier,  231 
Cashier's  check,  176 
Casualty  insurance,  130 
Cattle  trespass,  282 


3*3 


324 


INDEX 


Caveat  emptor,  39,  85,  1S7 
Certificate  of  deposit,  152,  175 
of  incorporation,  257 
of  protest,  205 
Certified  checks,  208 
Champerty,  33 
Chancery  court,  8 
Charter  of  a  corporation,  257 
Charter  party,  118 
Chattel  mortgage,  312 
Chattel  personal,  4,  303 
Chattel  real,  4,  303 
Checks,  53,  145.  i52'  J75»  2oS-  209 
Chose  in  action,  4,  66,  71,  303 
Clearing  house,  145 
Clearing-house  certificates,  145 
Clubs,  218 
Codification,  2 
Collateral  security,  104,  182 
Commercial  agencies,  144 
Commodatiim,  98 
Common  carriers,  1 13-122 
Common  law,  2 

Communication  of  acceptance,  17 
of  offer,  16 
of  revocation,  18 
Community  property,  277 
Compensation  in  agency,  224 
in  bailment,  107,  108 
in  corporations,  261 
in  partnership,  247 
Complaint,  8 

Composition  with  creditors,  23 
Compound  interest,  149 
Concealment,  39,  135 
Conditional  sales,  67 
Confusion  of  goods,  97,  309 
Consent,  reality  of,  35-40 
Consideration,    22-25,    28,    67-70,    96, 

159.  !70,  183 
Constitutional  law,  3 
Contracts,  5,  13-64 

negotiable,  168-214 
of  bailment,  96-T27 
of  carriers,  )  16,  118 


Contracts  of  guaranty,  157-167 

of  insurance,  1 28-1 41 

of  sale,  65-95 

tc  sell  lands,  283,  285 
Contribution,  132,  139,  164 
Conveyances  of  lands,  284 
Corporations,  218,  244,  256-267 
Corporeal  property,  4,  270 
Coupons,  177,  179 
Covenants,  284,  297 
Credit,  144 
Creditors  of  a  corporation,  265 

of  partnership,  249,  250 
Criminal  law,  3,  30 
Courts,  7,  8 

admiralty,  8 

equity,  8 

law,  7 
Crops,  28,  72,  279 
Cumulative  voting,  260 
Currency,  145 
Current  funds,  145 
Curtesy,  estate  of,  273 
Custom,  2,  51,  229 

Damages,  58,  87,  90,  91 

Date  of  bill  or  note,  183 

Days  of  grace,  170 

Death,   19,  51,  56,  103,   162,  223,  251 

271 
Deceit,  6,  38 
Deed,  22,  284,  287 
Defenses    to    negotiable    instruments, 

189-191 
Del  credere  agent,  227 
Delegation  by  agent,  226 
Delivery  by  carrier,  1 18 
by  seller,  80 
of  deed,  286 

of  negotiable  instrument,  184 
Demand  bills  or  notes,  187,  198 
Deposit  (deposition),  98 
Deposits  in  banks,  III,  150 
Description,  sale  by,  78,  83 
Directors  of  a  corporation,  260 


INDEX 


325 


Discharge  of  contract,  15,  52-61 
of  guarantor,  160-163 
of  mortgage,  291,  295 

Discount,  153 

Dissolution  of  corporation,  266 
of  partnership,  250 

Dividends,  264 

Divisible  contracts,  35,  57 

Dormant  partner,  246 

Dower,  273 

Draft,  176 

Drawee  of  bill,  172,  181,  193 

Drawer  of  bill,  172,  195 

Duress,  39 

Earnest  money,  27 
Easements,  283 
Emblements,  279 
Employers'  Liability  Acts,  240 
Equitable  estates,  278 
Equity  courts,  8 
Escrow,  286 

Estates,  4,  270,  272-278,  306 
Estates  for  years,  274,  296 
Estates  of  inheritance,  272 
Estoppel,  137,  229 
Exchange,  146 
Executed  contract,  16 
Executed  sale,  66 
Execution,  9 
Executory  contract,  16 
Executory  sale,  66 
Express  contract,  16 
Express  warranty,  82 

Factor,  230 

Factors  Acts,  67 

Fee-simple  estates,  272 

Fee-tail  estates,  273 

Fellow-servant,  239 

Fences,  282 

Fidelity  insurance,  130 

Finder  of  lost  property,  96,  307 

Fire  insurance,  130 

Fitness,  warranty  of,  84 


Fixtures,  280-282 
Foreclosure,  105,  296 
Foreign  exchange,  147 
Forgery,  190,  222 
Forms  of  documents : 

Acceptances  of  bill,  192 

Assignment  of  contract,  42 

Assignment  of  mortgage,  294 

Bill  of  exchange,  172 

Bill  of  lading,  119 

Bill  of  sale,  69 

Bills  in  a  set,  173 

Bond,  29,  178 

Bond  coupons,  179 

Cashier's  check,  176 

Certificate  of  deposit,  175 

Certificate  of  incorporation,  257 

Certificate  of  protest,  205 

Certified  check,  176 

Check,  175 

Contract,  40-42 

Contract  of  sale,  73 

Discharge  of  mortgage,  295 

Guaranty,  165 

Indorsements,  186 

Land  contract,  285 

Lease,  298 

Mortgage,  292 

Notice  of  dishonor,  207 

Partnership  agreement,  252 

Power  of  attorney,  220 

Promissory  note,  174 

Protested  note,  206 

Puts  and  calls,  32 

Stock  certificate,  259 

Transfer  of  stock  certificate,  260 

Warranty  deed,  287 

Will,  290 
Fraud,  38,  67,  190,  233 
Frauds,  Statute  of,  25-28,  70-73 
Freehold  estates,  272 
Fructits  iiidustriales,  279 
Fructus  naturales,  279 
Fungible  goods,  78 
Futures,  32 


326 


INDEX 


Gambling  contracts,  31,  35 
General  agent,  229 
General  average,  138 
General  manager,  262 
General  partnership,  244 
Gift,  307 

causa  mortis,  308 

inter  vivos,  308 
Good  faith,  134,  188,  225,  247 
Good  will,  251,  305 
Goods,  66,  71 
Grace,  days  of,  170 
Gratuitous  agent,  227 
Gratuitous  bailment,  100-103 
Gratuitous  promise,  22 
Guaranty,  41,  157-167,  197,  208 
Guaranty  insurance,  130 
Guests  of  an  innkeeper,  11 1 

Habendum,  286 

Heir,  289 

Hereditaments,  271 

Hiring  in  bailment,  98,  106-111 

Holder  in  due  course,  187-191 

Homestead  estate,  273 

Illegality,  25,  30-35,  163 
Implied  contract,  16 
Implied  warranties,  83-85 
Impossibility  of  performance,  54-56,  223 
Incorporeal  property,  4,  270 
Indefinite  agreements,  1  5 
Indemnity,  131,  158,  164,  225 
Indivisible  contracts,  34,  56 
Indorsement,  185-187 
Indorser's  contract,  195-198 
Infants,  19,  163,  217,  246 
Injunction,  14,  49 
Innkeepers,  1 1 1-1 13 
Insanity,  21,  217,  223,  251 
Insolvency,  59,  60 
Insurable  interest,  133 
Insurance,  33,  1 28-141 
Interest,  148-150,  154 
Int>  rnational  law,  3 


Intoxication,  21 
Irregular  indorser,  196 
Irrevocable  agency,  223 

Joint  agents,  219 

Joint  and  several  obligations,  249 

Joint  obligations  of  partners,  249 

Joint-stock  companies,  244,  252 

Joint  tenancy,  276 

Judgment,  9,  294 

Land,  271,  278 

Landlord  and  tenant,  296-301 

Lateral  support  of  land,  282 

Law,  1-4 

Lease,  296-298,  301 

Legal-tender  money,  53,  145,  146 

Letter  of  credit,  193 

Levy,  9 

Libel,  5 

Lien,  bailee's,  no 

on  property,  296 

seller's,  88 
Life  estates,  273 
Life  insurance,  129 
Limited  partnerships,  246 
Loans,  152 

Lobbying  contracts,  33 
Lost  property,  96,  306 

Mail,  notice  of  dishonor  by,  201,  202 

offer  by,  17 
Maker's  contract,  191 
Mandate  (mandatum),  98 
Marine  insurance,  130,  138 
Married  women,  21, 52,  218,  246,  289,312 
Master  and  servant,  238-241 
Memorandum  of  sale,  73 
Minerals,  278,  279 
Misrepresentation,  38 
Mistake,  36,  37 
Money,  145 
Moral  obligation,  22 
Mortgage,  153,  291,  312 
Mutuum,  97 


INDEX 


327 


Names,  305 
National  hanks,  150 
Necessaries,  20,  21,  222 
Negligence,  5,  101,  102,  105,  107,  109, 
no,  113,  123,  124,  132,  227,  23S-241 
Negotiability,  50,  171,  180-1S2 
Negotiable  instruments,  168-214,  232 
Negotiable  Instruments  Law,  179 
Negotiation,  185 
Next  of  kin,  291 
Notary,  204-206 
Notice  by  guarantee,  159 
Notice  of  defect  in  bill  or  note,  189 
Notice  of  dishonor,  200-204,  207 
Noting  of  protest,  206 
Novation,  14 

Obligation,  5 
Occupancy,  title  by,  306 
Offer  and  acceptance,  16-19 
Officers  of  a  corporation,  261 
Open  policy,  129,  131 
Opinion,  39,  82 
Option  contracts,  18,  32 
Orphans'  court,  7 
Ostensible  partner,  245 
Overdue  bills  or  notes,  187 

Partnership  agreement,  252 
Partnership  real  estate,  277 
Partnerships,  218,  243-251 
Part  payment,  73 
Passengers,  122,  239 
Past  consideration,  24 
Pawn,  see  Pledge 
Pawnbrokers,  106 
Payment,  73,  81,  148 

for  honor,  200 

of  smaller  sum,  23 
Performance  of  contract,  53,  80 
Personal  property,  303-313 
Pledge,  104-106 
Policy  of  insurance,'  129 

open  policy,  129 

valued  policy,  129 


Power  coupled  with   an  interest,   223, 

224 
Power  of  attorney,  220,  22S,  259 
Powers  of  an  agent,  227-233 

of  a  corporation,  262 

of  a  partner,  247-249 
Preferred  stock,  264 
Presentment  for  acceptance,  194 
Presentment   of  bill   or  note  for  pay- 
ment, 19S-200 
Price,  70,  90 

Principal  and  agent,  215-237 
Principal  and  third  party,  227-234 
Probate  court,  7 
Procedure  in  courts,  3,  8,  9 
Promissory  note,  174 
Property,  4 

in  goods,  66 

in  lands,  269-302 

in  personalty,  303-313 
Protest,  204-208 
Provisions,  sale  of,  85 
Public  enemy,  115 
Purchaser  in  due  course,  67,  187 
Puts  and  calls,  32 

Qualified  acceptance  of  bill  of  exchange, 
192 

of  offer,  18 
Qualified  indorsement,  185 
Quasi-contracts,  6 
Quitclaim  deed,  284 

Ratification,  20,  219-222 
Real  property,  4,  72,  269-302 
Receipt,  148 
Receiver,  266 
Receiver's  certificate,  266 
Reexchange,  205,  206 
Referee  in  case  of  need,  193 
Reinsurance,  130 
Release,  15,  52 
Remainder,  estate  of,  276 
Remedies  for  breach  of   contract,   58, 
90,  91 


328 


INDEX 


Remedies  for  breach  of  contract  of  sale, 

87-91 

for  breach  of  warranty,  86 
of  corporate  creditors,  265 
of  firm  creditors,  249,  250 
of  landlord,  300 

Rent,  300 

Repairs  under  a  lease,  299 

Report  of  corporation,  266 

Representations  in  insurance,  135 

Resale,  88,  89 

Rescission,  52,  89 

Restraint  of  trade,  33 

Restrictive  indorsement,  1S6 

Reversion,  estate  of,  275 

Revocation  by  guarantor,  162 
of  agency,  223 
of  offer,  1 8 

Reward,  offer  of,  16,  24 

Risk  by  servant,  240 

Risk  of  loss  of  goods,  79 

Safe-deposit  company,  no 

Sales  of  goods,  65-95 

Sample,  sale  by,  83 

Savings  bank?,  151 

Seal,  28,  183,  219 

Sealed  instrument,  22,  2S,  232.  See  Deed 

Security  for  loans,  153 

Seller's  duties,  So 

Seller's  lien,  88 

Servant,  238-241 

Simple  contract,  22 

Slander,  5 

Special  agent,  229 

Specialty,  22 

Specific  goods,  75-77 

Specific  performance  of  contracts,  14,  58 

Standard  fire-insurance  policy,  138 

Stare  decisis,  2 

State  banks,  150 

Statute  law,  2 

Statute  of  Frauds,  25-28,  70-74,  158, 

159,  219,  207 
Statute  of  Limitations,  24,  27,  29,  58 


Stock  certificate,  259 
Stock  corporations,  256 
Stockholders,  258,  264,  265 
Stoppage  in  transitu,  88 
Subagent,  219,  226 
Subletting  by  tenant,  300 
Subrogation,  131,  139,  164 
Subscriptions,  24 
Substantial  performance,  54 
Substituted  contract,  53 
Suicide,  132 
Surety,  157,  162 
Surrogate's  court,  7 

Telegraph  companies,  124 
Telephone  companies,  124 
Tenancy  at  will,  274 

by  entireties,  277 

by  sufferance,  274 

from  year  to  year,  274 

in  common,  277 

joint,  276 
Tender,  53,  148 
Tenements,  271 

Third  party  in  agency,  227-234 
Third  party  to  contract,  48,  49 
Title  insurance,  130 
Title  to  goods,  66-70,  74-80 

to  lands,  284,  299 

warranty  of,  83 
Tontine  insurance,  129 
Tort,  5,  48,  23S-241 
Trademarks,  304 
Treasure-trove,  307 
Trees,  28,  278-280 
Trespass,  5,  282 
Trust,  6,  13,  278,  311 
Trust  companies,  1 50 

Ultra  vires  acts,  263,  265 
Unascertained  goods,  77-79 
Undisclosed  principal,  231,  232 
Undue  influence,  39 
Unilateral  contract,  16 
Usury,  149 


jM)i;x 


329 


Value,  23/68,  188 
Valued  policy,  129,  131 
Vegetable  products,  279 
Verdict,  9 
Vice  principal,  239 
Voidable  contracts,  19,  21,  217,  218 
Void   contracts,    19,   21,   217,   218.    See 
Illegal  contracts 

Wagering  contracts,  31,  131 
Waiver,  52,  137,  1S2,  186,  200,  202 
Warehouseman,  no 
Warranty,  3S,  57 


Warranty  in  insurance,  136 

in  lease,  297 

in  sale  of  bill  or  note,  196 

of  authority,  233 

of  goods,  81-87 

of  title,  83 
Warranty  deed,  284,  287 
Waste,  299 
Waters,  279,  282 
Wharfinger,   no 
Will,  286,  289,  290 
Writing,  see  Statute  of  Frauds 


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